- In This Section
- Risk Premium
- Investment Objectives
- Asset Class Cycles
- Allocation Models
Investors who have time to ride out the inevitable ups and downs of the market tend to concentrate their portfolios in stocks. Historically, stocks have always provided positive returns over periods of 15 years or more and have the greatest long-term growth potential of any traditional investment. However, if you're saving for a major but shorter-term financial goal, like paying college tuition, you might be less inclined to put your entire portfolio at risk. Because bonds pay regular interest, in addition to the return of principal at maturity, they are typically attractive to investors looking for a regular income stream or a lump sum payment at some point in the future. While bonds are not risk-free, high-grade corporate bonds, municipals and U.S. Treasuries are almost always less volatile than stocks.
Cash and cash equivalent investments, like money market funds, certificates of deposit, and Treasury bills, typically carry the lowest amount of risk. These short-term investments usually pay interest, but generally provide smaller returns than the other major asset classes, or investment choices. One advantage is that cash and cash equivalents are highly liquid, so you can convert your investments easily into currency.
On the other hand, cash investments often do not pay interest rates high enough to offset inflation, so though your investment is growing, you may actually be losing purchasing power over time. For this reason, you might allocate a portion of your portfolio to cash in case of emergency expenses or to pay for shorter-term goals, while the majority of your portfolio concentrates in securities with greater growth potential.