Running Head: ASSET CLASSES PAPER Asset Classes Paper Stacey Browning University of Phoenix Asset Classes Paper Investment portfolios consist of investment assets and these investment assets are categorized into broader classes known as asset classes (Bodie et al, 2008). Asset classes can be stocks, bonds, real estate, commodities, and money markets (Bodie et al, 2008). Individuals as well as businesses can have investment portfolios. Sometimes investors use different avenues when investing their money, such as mutual funds.
Mutual funds involve many investors pooling their money for the purpose of investing it in different asset classes (Investopedia, 2010). There are different organizations that offer mutual funds services. This paper will explain asset classes in one mutual fund organization and asset classes in one organization in the Dow 30. Vanguard is one of the world’s largest investment management companies, headquartered in Valley Forge, Pennsylvania (Vanguard, 2010). As of December 31, 2009 Vanguard had approximately $1. 3 trillion in U. S. mutual funds (Vanguard, 2010).
The different asset classes in Vanguard’s mutual funds are money markets, bonds, and stocks (Vanguard, 2010). Money markets are short-term debt securities that are highly marketable and are relatively low risk (Bodie et al, 2008). Stocks are ownership shares in a publicly traded company and are risky because if a company files bankruptcy, the shares become worthless (Bodie et al, 2008). Bonds are long-term debt securities and can be in the form of Treasury bonds, corporate bonds, or municipal bonds and are relatively low risk (Bodie et al, 2008).
Choosing the right asset class in mutual funds for an investor can help them keep their portfolios diverse and offer lower risks during declining economic times. Vanguard conducted research regarding investors and how they chose asset classes during 2009, after the economy started to show some improvement. They found that through November 2009, investors pulled $500 billion from money markets and $9 billion from stocks, but added $340 billion in bonds because they believe this asset class to be a relatively afe investment (Vanguard Research Finds, 2010). However, as with all investments, bonds have certain risks as well and investors should be aware of them (Curtis, 2010). Some of the risks associated with bonds include interest rate risk, reinvestment risk, inflation risk, credit/default risk, rating downgrades, and liquidity risk (Curtis, 2010). Investing only in bonds won’t give an investor a risk free portfolio. Diversification of one’s portfolio offers low risk to the investor.
Vanguard’s (2010) research also found that between 2007 and 2009, an investor with a 100% stocks portfolio lost nearly 25% and an investor with a 50% stocks and 50% bonds portfolio lost only 5%. Companies should keep this in mind when allocating assets in their portfolios. One such company is Wal-Mart. Wal-mart, which is ranked number one in Fortunes magazines most admired companies, is headquartered in Bentonville, Arkansas and offers a variety of products such as groceries and general merchandise under one roof (Wal-Mart, 2010).
Wal-Mart was founded in 1962 and grew into an international company in the early 1990’s (Wal-Mart, 2010). Some of Wal-Marts investments include interest shares in other companies and real-estate in the form of new stores (Wal-Mart 2009 Annual, 2010). In the 2009 Annual Report (2010) Wal-Mart describes its investments in other companies in China, India, Japan, and Chile. These investments give Wal-Mart a certain percentage of ownership in the companies. This can be portrayed as a stock investment.
Wal-Mart invests in stocks from companies around the world to help them make a name for themselves in other countries. This is how Wal-Mart is an international organization. The investments usually lead to the creation of stores or manufacturing facilities in these countries. Wal-Mart should be wise when considering these types of investments, and they do research to make sure that the risk is not too high and that they only invest what they need in order to get their required rate of return. Wal-Mart has spent an estimated total of $1. billion on these investments (Wal-Mart 2009 Annual, 2010). A real-estate investment is another asset class that Wal-Mart invests in. Wal-Mart’s real estate investments include numerous stores in the U. S. as well as in the UK, Canada, Argentina, China, Mexico, and Brazil (just to name a few) (Wal-Mart 2009 Annual, 2010). In 2009, Wal-Mart’s buildings and improvements amounted to $73. 8 billion (Wal-Mart 2009 Annual, 2010). Wal-Mart invests in real estate, because if a store is ever to be closed, Wal-Mart can keep the building for another use or decide to sell it for cash.
In conclusion, knowing about different types of asset classes before investing can help an individual or company choose the right investments for their portfolio. Keeping one’s portfolio diverse by choosing different classes of assets instead of fixating on one can help to keep risk low. Mutual funds offer many types of asset classes and can help an investor keep a diverse portfolio. Companies also need to keep their investments diverse to help keep their portfolios low in risk. References Bodie, Z. , Kane, A. , & Marcus, A. J. (2008). Essentials of Investments. 7th ed. ) McGraw-Hill. New York. Curtis, Glenn (2010). 6 Biggest Bond Risks. Retrieved June 7, 2010 from http://www. investopedia. com/articles/bonds/08/bond-risks. asp Investopedia. (2010). Mutual Fund. Retrieved June 7, 2010 from http://www. investopedia. com/terms/m/mutualfund. asp Wal-Mart 2009 Annual Report. (2010). Retrieved June 7, 2010 from http://media. corporateir. net/media_files/irol/11/112761/ARs/2009_Annual_Report. pdf Wal-Mart Corporate (2010). About Us. Retrieved June 7, 2010 from http://walmartstores. com/AboutUs/ Vanguard. 2010). Mutual Fund Investing Fund Categories. Retrieved June 7, 2010 from https://personal. vanguard. com/us/whatweoffer/mutualfundinvesting/categories? Link=facet Vanguard. (2010). Who We Are. Retrieved June 7, 2010 from https://personal. vanguard. com/us/content/Home/WhyVanguard/AboutVanguardWhoWeAreContent. jsp Vanguard Research Finds Investors Stayed with Stocks During Decline; Showed Little Appetite for Adding More During Rebound (4 March, 2010). Vanguard Pressroom. Retrieved June 7, 2010 from http://onlinepressroom. net/vanguard/