Summary
Highlights
Asset allocation is an investment strategy that diversifies investments across various asset classes to balance risk and reward. This strategy is guided by financial goals, risk tolerance, and time horizon, aiming to minimize volatility and maximize returns for long-term financial objectives.
An asset class is a group of investments with similar characteristics and market behavior. Common asset classes include stocks, bonds, and cash. Other classes are real estate, commodities, currencies, futures, and options. Adjusting asset allocation over time is crucial for wealth preservation, which focuses on safeguarding money against inflation and market fluctuations, especially during life changes or approaching retirement.
Bonds are a primary asset class for asset allocation and wealth preservation. They provide predictable interest payments (coupon payments) and tend to perform well when other asset classes decline. Companies and governments issue bonds to raise funds for projects, operations, or debt refinancing.
A bond represents a loan from an investor to an issuer. The 'face' or 'par' value is the principal loan amount. The 'coupon' refers to the regular interest payments, determined by the 'coupon rate'. Bonds typically have face values of $100 or $1,000 and mature at face value. The 'maturity date' is when the issuer repays the face value, ending coupon payments.
The stock market game allows investments in corporate bonds (issued by companies, typically $1,000 face value), municipal bonds (issued by state/local governments, $5,000 face value), and government bonds (issued by the US Treasury, $10,000 face value). A bond's market price can differ from its face value, influenced by overall bond market performance, issuer's credit quality, time to maturity, and its coupon rate compared to current market interest rates.
Before trading bonds, consider researching various aspects. For corporate bonds, investigate why companies issue both stocks and bonds. For municipal bonds, research why your local government is raising money. For government bonds, think about why governments borrow money and what US Treasury bonds have funded historically and are funding today.