Using variety of asset classes can minimize risk

posted 06:46 AM 09/09
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Asset allocation is the process of distributing funds among various investment instruments or asset classes for the purpose of managing risk. Done properly, asset allocation enhances the likelihood of achieving desired investment returns with the least amount of risk.

It accomplishes this by reducing the exposure to losses caused by a decline in the value of one or more of a portfolio’s components. Distributing funds among several asset classes that have dissimilar expected return and risk characteristics increases the probability that a portfolio’s components will complement one another, thereby improving overall risk-adjusted returns.

As the world of investing has grown larger and more complex, so too have the number of asset classes and investment styles.

Here are some common categories:

 • Growth stocks tend to have prices that are high relative to earnings, dividends or book value. Earnings growth projections tend to be higher than the market average.

 • Value stocks tend to have prices that are low relative to earnings, dividends or assets. Earnings growth tends to be relatively modest and often is influenced by short-term economic fluctuations.

 • International markets tend to be those of more mature, industrialized countries of Europe, as well as Japan, Australia and New Zealand.

Emerging markets comprise the developing economies of Southeast Asia, Latin America, Africa and Eastern Europe.

 • Fixed-income includes the universe of securities that pay a regular stream of interest income such as corporate bonds, Treasuries, mortgage securities and foreign bonds, as well as hybrid securities such as convertible bonds.

Market capitalization is calculated by multiplying the number of outstanding company shares by the stock price.

 • Large-cap stocks have a market capitalization of $5 billion or more.

 • Mid-cap stocks are those with a market capitalization of more than $1 billion but less than $5 billion.

 • The small-cap market securities consist of stocks with a market capitalization of less than $1 billion.

 • Micro-cap stocks are those small-cap stocks that have an approximate market capitalization between $50 million and $300 million. Market-cap below this threshold is often called nano-cap.

Ann Cooke is a financial adviser at MorganStanley SmithBarney in Olympia. She may be reached at 360-943-2300 or www.fa.smithbarney.com/columbiapacificgroup.

Comments

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