The adage, “Don’t put all your eggs in one basket,” proves itself true in many things in life. It is especially true with stocks and bonds. One question I often get is, “Should I focus my investments on large cap stocks?” These stocks, often referred to as blue chip stocks, are associated with market-leading companies that have performed well throughout their trading history, like Nike, Coca-Cola, and Apple. My answer to that common question is a resounding, “No!” Why? Because even though they have managed to stand the test of time so far, they are not without risk. In fact, in 2008, many of these blue chip stocks declined by 38%. Ouch.
My advice is always to diversify. One proven method is to ensure you spread out your investments, so you have some in each asset class. An asset class is a group of securities that exhibits similar characteristics, behaves similarly in the marketplace, and is subject to the same laws and regulations. The three main asset classes are equities, or stocks; fixed income, or bonds; and cash equivalents. Each asset class goes up and down, with each serving a purpose within your portfolio.
Many advisors try to use a Callan Chart to help their clients understand asset classes and follow the asset classes by color. While Callan Charts indicate annual returns for different asset classes over the last 20 years and ranks them, they don’t really show a pattern, and you never know which will be up and which will be down. Instead, I prefer to discuss asset classes in terms of something everyone understands – shoes. Like asset classes, they each serve a purpose, and it is a good idea for your closet, and your portfolio, to have some of each.
Boat shoes: Like a boat shoe, a US Treasury bond is comfortable, and very American. A Treasury bond, or T-Bond, is a marketable, fixed-interest US government debt with a maturity of more than 10 years. It is low risk.
Flats: Just like everyone needs flats in their closet, it’s also a very good idea to have corporate bonds. A corporate bond is a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. It carries low to medium risk.
Designer loafers: Just like a Gucci or Chanel shoe, municipal bonds are great for people in high tax brackets. A muni bond is a debt security issued by a state, municipality, or county to finance its capital expenditures, including the construction of highways, bridges, or schools. They are exempt from federal taxes and from most state and local taxes, which is what makes them especially attractive to people in high income tax brackets. They are low risk.
Sneakers: Like a faithful, comfy sneaker, cash carries no risk. You need it to live your life and make purchases.
Espadrilles: Maybe you’re not sure if you really need this fashion fad with exotic roots, but just as espadrilles add some international flair to your closet, international stocks take at least part of your money out of the US. These include any stocks for a company that is based outside of the US. They may or may not be traded on a US stock exchange and come with a medium to high risk.
Stilettos: If you have ever worn them, you know they can look and feel great, but after a while, stilettos can be killer on your feet. That’s how it goes with emerging markets. They are high risk and high reward. An emerging market economy (EME) is defined as an economy with low to middle income. Such countries, like India or Malaysia, constitute approximately 80% of the global population and represent about 20% of the world’s economies.
Boots: Just like you take these bad boys out when it is cold or wet, commodities are high risk.
Kitten heels: Like this stylish and versatile footwear, everyone should have REITs in their repertoire. A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, and hotels. These involve medium risk.
Platform shoe: As with any style that is synonymous with a particular era, when platform shoes are in, they are in. But when they are not, they really are not. Much is the same for small cap stocks. They carry a higher risk.
Pumps: A good pump is as fashionable as it is functional. And like a classic pump, everyone needs some good large cap stocks. This term refers to the largest publicly traded companies like General Electric and Walmart. With their medium risk level, they are tried and true.
Birkenstocks: ESG/SRI – this is Environmental, Social, Governmental or Socially Responsible Investing. This is where you put your values into your portfolio, you can include or exclude what you want or don’t want. For an example you can add companies that promote women as an include. You can also exclude guns or tobacco.
Like there are many shoes to choose from within these broad categories of styles, there’s also a lot to choose from when it comes to building your portfolio. The good news is that you don’t have to do it alone. ACM Wealth can help. If you’re ready to go “shoe” shopping, contact us today.