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What Do the Main Asset Classes Have to Offer?

main asset classes

Trying to decide where to invest your money and not coming up with any good answers from traditional investments? You’re not alone.

The three main asset classes are conventionally: equities (stocks), fixed-income (bonds), and cash equivalents (money market), but many people are looking to emerging asset classes such as impact investing, microfinance, and renewable energy to help diversify their personal portfolios.  In this piece, we cover existing asset classes, teach you about their historical returns, and highlight why there is presently no easy decision on where to invest one’s money. In the future we’ll cover emerging asset classes and what they have to offer, but for now, let’s jump in!

Any graphs, statistics, or quotes that follow are from a fantastic Bloomberg New Energy Finance report which can be found here: http://www.bnef.com/WhitePapers/view/104.
Low yield investments

So just how much are small-time retail investors like you and me investing these days? A remarkable amount of money, that’s how much. Retail investors have invested almost $9 trillion in low-yield (safer) investments such as money market funds, time and savings deposits, savings bonds, and treasuries.  That is an impressive amount of capital and it doesn’t even include the trillions more invested in stocks and certain types of bonds.

The downside of safer investments like Treasuries or time and savings deposits is they are producing historically low returns.
Treasury 10-year returns are near historic lows.

6 month Certificates of Deposit (CDs) are also at historically low rates of return and bankerate.com puts the current national average at 0.2% APY. People are flocking to these paltry returns because of the unstable economy and volatility of the stock market in recent years. If you find yourself investing money here, you motto is probably something along the lines of, “better safe than sorry.”

Equities (stocks)

The stock market: where fortunes are made and lost. “The Standard and Poor’s 500 index is the benchmark for US equities. It contains many of the largest public companies and is used as a proxy for the performance of the entire equity market.” For that reason we will refer to
the S&P500 when discussing stocks.

In case you hadn’t heard, the stock market has been particularly volatile the last few years, losing 38% of its value in 2008 and regaining 36% of its value in the two years that followed. Historically, the stockmarket has produced an average yearly return of 7.15% since the 1920s (not bad). However, if we just look at the average performance from 2002-2011 we see an average annual return of 2.99% –not to mention the incredible market swings that occurred in the period. Meaning, if you pulled investments out of the market at the wrong time, you could have lost a lot of money, as many did. Volatility can hurt.

Bonds
The bond market is historically less volatile (safer) than the stock market, but unsurprisingly produces historically lower returns. Partly due to demand for “safer” investments, the bond market is enormous at $38 trillion in the U.S.

The average returns on bonds have decreased significantly in the last few years, but surprisingly, they have produced a higher rate of return between 2002-2011 than the stock market (4% average annual return).


It’s easy to see why people are having trouble deciding where to invest their money right now. The options seem to be: making sure your money is 100% secure but not seeing any substantial return, hope for larger returns in the stock market but also hope your stomach can handle the volatility, or consider reasonable returns in the bonds (which are not without their own set of risks). Investing money is tricky stuff, but hopefully this gives you a good foundation for what’s out there. Check back again soon, when we’ll look at what sorts of emerging asset classes are out there and how they compare to these more conventional ones.

 

Will Quinn is an environmental consultant with ICF International and his opinions are his own. He holds a B.S. in Environmental Policy Analysis and Planning from UC Davis, is the Blog Editor for the solar financing marketplace Mosaic, and is passionate about practical solutions to environmental problems. He believes people take action when personal benefits outweigh the barriers. And an impact investment that allows millions of people to go solar from their computers just makes sense. He is excited to be part of the solar crowd and hopes you are too.

Disclaimer: Any opinions expressed reflect the current judgment of the author of the relevant article, and does not necessarily reflect the opinion of Solar Mosaic. Nothing herein shall constitute or be construed as an offering of financial instruments, or as investment advice or recommendations by Solar Mosaic of an investment strategy or whether or not to “buy,” “sell” or “hold” an investment.

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Comments

  1. This is a an excellent introduction to various asset classes such as: cash, bonds and equities Will.

    Each asset class has a different risk versus return profile.

    The proportion of cash, bonds and equities that you’ll have in your investment portfolio will depend on how much risk you want to take.

    For more information about the most popular asset classes, cash vs bonds vs equities, and ideas about what percentage you should hold of each, go here:

    http://www.mdrmoney.com/investment-portfolio-asset-class-building-blocks-investment-portfolios

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