Have you ever thought about what is meant by the various terms you hear and see about investing? We will attempt in this article to cover several terms and hope it covers a lot of questions or curiosities. In today’s markets – stock, bond and money markets—things have changed very quickly since the beginning of the year. Increasing your understanding might help you become a more informed saver and investor as you work toward your goals for yourself and your family.
Let’s start by putting assets into classes: Stocks, bonds, cash, real estate. You can also classify these according to risk with stocks and real estate carrying more risk than bonds and bonds more than cash. And then each of these can be further categorized by types of stocks, bonds, real estate or cash holdings.
One term in use is “asset bubbles.” What are they and how do they happen? Typically, as many of you have probably experienced, it is when a certain class of assets or a certain asset moves up very quickly in value, often-times outpacing the actual growth of the company or sector. In many cases, this is the result of a strong money supply (as we are seeing now), low inflation and low interest rates. Alternatively, a stock or bond or asset class appreciates rapidly due to another term: “momentum.” Oftentimes a stock may rise and continue to rise mainly because of the velocity and sheer number of people buying the stock. This often increases the risk substantially in a short period of time. Nonetheless, many investors see it as an opportunity, but they should examine their tolerance for risk. The opposite of momentum or buying into an asset which has risen substantially is called “contrarian.” Put another way, running contra to current investor sentiment.
Stocks or sectors are often put into one of two descriptions categorized as growth vs. value. A growth investment means that the potential for growth of the company or sector is seen as significant, whereas the value investment means that the asset is probably selling or trading for less than it is potentially worth. Growth stocks tend to be found in technology, whereas value stocks tend to be found in financials for example (like banks). Currently, there are 11 different sectors of the market. Technology currently makes up the greatest share of market value (approximately 28%). Energy, by contrast (after five years of underperformance), is the lowest at around 2%.
The growth sectors generally are technology, communication services, consumer cyclicals, consumer durables and health care. Value sectors are generally industrials, basic materials, utilities, energy, real estate and financials. Sometimes a sector can be both – depending upon current market valuations.
When it comes to bonds, investors take note if those are issued by governments or corporations. They also take note as to the quality of the issuer and the likelihood of payment of interest and repayment of principal. In a low interest rate environment, investors also watch for the potential impact inflation can have on interest rates and hence the market value of bonds. Today, with interest rates so low and the money supply having grown, there is renewed interest in government treasury bonds by way of those bonds called TIPS – Treasury Inflation Protected Securities. Those bonds rise in principal value with inflation but the payout remains the same. Should inflation be stable or perhaps we experience deflation, that value (not the payouts) could decrease. So, investors concerned about inflation and who might not want the risk of stocks or real estate, sometimes consider these types of bonds.
Investors might wonder when and where to invest in certain sectors along with how they want to be invested in bonds, cash and real estate. Becoming a more informed investor is at the heart of every financial plan and relationship with an investment firm or professional. Knowledge can help you be prepared for the decisions you make as you build and maintain your plan and work toward your financial future.
Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management and Raymond James. He resides in Grayton Beach. He has been in financial services for over 33 years. His main office is located at First Florida Bank, a division of the First, A National Banking Association, 2000 98 Palms Blvd, Destin, FL 32541. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City, Pensacola, Tallahassee and Moultrie, GA. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.firstname.lastname@example.org. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management First Florida Bank, and The First, A National Banking Association are not registered broker/dealers and are independent of Raymond James Financial Services. Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Investors should consult their investment professional prior to making an investment decision. Please note, changes in tax law may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax matters. You should discuss tax or legal matters with the appropriate professional.