Asset allocation means understanding the different types of investments that exist so that investors can determine how to construct an investment portfolio. There are stocks and stock mutual funds, corporate and municipal bonds, precious metals as well as other types of investment opportunities.
The following is a short explanation of the four most popular asset classes and how to invest:
Stocks – the SEC advises that stocks have the greatest risk of all the investment types but also have the highest returns. In terms of including stocks in an investment portfolio, the SEC terms the stocks as an asset’s “heavy hitter.” Stocks are volatile and they do not always pay big returns. That said, it is good to have other types of investments in your portfolio that may be more conservative – in other words, balance out the portfolio.
Bonds – Bonds are less risky than stocks but have “modest returns,” reports the SEC. Most people have heard of “junk bonds” or high yield bonds. These are bonds are more volatile like stocks but have a higher rate of return versus the more conservative stocks.
Cash – Investing in cash is not exactly putting money under the bed but rather referd to savings deposits, certificates of deposit, treasury bills, money market deposit accounts, and money market funds. The SEC says these are the conservative investments, but also offer the lowest return of the three major asset categories.
Precious Metals – Historically, since ancient times, precious metals were important as currency but are now regarded mainly as investment and industrial commodities. Gold, silver, platinum, and palladium each are widely traded in a variety of formats. You can buy stocks tied to precious metals such as a Gold ETF or a mining company. However, gold or silver can be used as a hedge against inflation, deflation or currency devaluation. If you are worried about further currency devaluation in China for example, the last move by the Chinese government drove the price of gold (as expressed in yuan higher) and any substantial moves in the global currency market will create a lot of uncertainties, even for relatively stable economies, which would prompt safe-haven demand for gold and silver.
At GSI Exchange, many of our most sophisticated and successful clients are seeking diversification while minimizing the risk of a serious decline in stock or bond prices, which is why many investors are interested in learning about how to buy precious metals safely, securely and at the lowest prices.