Definitions:

Correlation: a statistic that measures the degree to which two securities move in relation to each other.

Key Differences Between Asset Classes:

Investing in stocks (shares of ownership in a company), bonds (debt promise issued by a company or government) and commodities (physical, tradeable goods) offers risk and rewards. The main difference among them is a function of risk tolerance and time. Short-term investing can bring high risk and high rewards, longer term investing can bring lower risks and more stable returns.

Stocks: A piece of ownership of a corporation. Owners of stock (called stockholders) are entitled to the company’s profits in the form of dividends, as well as voting rights for company management. Volatility and risk are dependent on the company’s management and sector. Key risks associated with an investment in stocks are:

• Systematic Risk – also known as market risk, this is the potential for the entire market to decline. Systematic risk cannot be diversified away.
• Unsystematic Risk – the risk that any one stock may go down in value, independent of the stock market as a whole. This risk may be minimized through diversification. This also incorporates business risk and event risk.
• Other risks – opportunity risk and liquidity risk may also apply to stocks in a portfolio.

Bonds: Bonds provide both income and return on capital. Diversification can be achieved by holding a variety of U.S. government, corporate and foreign bonds. If you are worried about inflation, shorten the duration of your holdings, which will reduce the sensitivity of the portfolio to interest rate changes. Bonds – which generate interest payments – move very steady and predictably. There are four main risks associated with an investment in bonds:

• Interest rate risk – When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. This is a risk if you need to sell a bond before its maturity date and interest rates are up. You may end up selling the bond for less than you paid for it.
• Inflation risk – This is the risk that the return you earn on your investment doesn’t keep pace with inflation. If you hold a bond paying 2% interest and inflation reaches 3%, your return is actually negative (-1%), when adjusted for inflation. You’ll still get your principal back when your bond matures, but it will be worth less in today’s dollars. Inflation risk increases the longer you hold a bond.
• Market risk – This is the risk that the entire bond market declines. If this happens, the price of your bond investments will likely fall regardless of the quality or type of bonds you hold. If you need to sell a bond before its maturity date, you may end up selling it for less than you paid for it.
• Credit risk – If you buy bonds from a company or government that isn’t financially stable, there’s more of a risk you’ll lose money. This is called credit risk or default risk. Sometimes, the issuer can’t make the interest payments to investors. It’s also possible the issuer won’t pay back the face value of the bond when it matures.

Commodities: A basket of commodities, including precious metals, energy (e.g., oil) and agricultural goods (e.g., wheat) provides a hedge against inflation. It also lowers the volatility of a portfolio holding only stocks. Commodities are subject to sharp swings in volatility. Futures contracts are used to invest in these accessible via ETFs, but come with an additional level of risk and complication. Commodities prices are determined by global forces of supply and demand.

FINRA member, ALPS Distributors.