Risky Business (Part 2)

What is an asset? If different risk factors affect the different asset classes differently, what does that mean?

An asset is something that provides a return. A financial asset provides expected future financial return. If it’s a bond or loan, the cash flows to the lender or bondholder come before any cash goes to the owners. We say those claims are senior. Usually they’re fixed by some kind of contract, and due to pay off in a fixed time-frame. That makes bonds quite stable.

If it’s equity or stock, the cashflows are junior, or residual. The equity holder gets what’s left over after the employees are paid, the bills are paid, and the taxes are paid. Equities are more risky because that cashflow stream is more variable. Obviously, if the business grows or becomes more efficient, stockholders benefits the most.

If it’s land, or real-estate, that cashflow comes from operations. It’s often senior even to bonds. The payments are contractual, but as long as the business stays there, there’s no maturity. Since rents can vary, real-estate is often more risky than bonds, but less so than stocks.

These are the three principal financial assets: stocks, bonds, and real-estate. (Cash is just a short-term bond.) By mixing and matching risk factors with asset classes, portfolio managers build portfolios that can meet specific goals in an efficient manner. That’s how use risk to benefit investors.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T20:03:23+00:00 August 9th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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