You know what is Retirement – it is when you accumulate a sum of money which allows you to lead a life you want without having to EVER WORK AGAIN for monetary gains. It can happen at different ages for different people.
Investing? When you put money into the bank, buy bonds, shares, mutual funds, ETFs, buy real estate or a even a partnership in a business, gold, art, antiques etc. with the goal of getting your money back plus earning a profit or interest, that’s investing. You could make a slight distinction by saying that those that pay interest are savings and those that give an uncertain return (could be a loss too!) are called investment. These different options are known as asset classes.
What are Asset Classes?
An asset class is a group of assets that react in a similar fashion to a variety of external financial forces. Asset classes come with unique risks and opportunities and you need to understand them both. What are examples of asset classes?
- Shares, Stocks or equities
- Bonds or fixed income
- Cash or cash equivalents
- Real estate or businesses interests
- Animals – like horses for racing
How each asset class works?
If all shares are part of the equity asset class, that means they are all subject to similar forces. Not all shares go up or down at the same time in the same proportion. But if the economy heats up, that improvement is going to help most shares. The tide rises. The outcome will be far different depending on the shares (or equity mutual fund). But a growing economy will move most shares in an upward direction. However, a rising economy will also drive the interest rates up. This will soften the bond prices which was created on a lower interest rate! However the accrual funds will start doing well as the yields start improving!
Then you need to understand how each asset class works and responds to the nudges of the economy.
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