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Understanding Asset Classes

An asset class is a group of securities that share a set of attributes, act similarly in response to different market conditions, and are governed by the same laws and regulations. Three of the most widely held asset classes are equities (stocks), fixed-income (bonds or debt securities) and cash equivalents (money market instruments). Diversified portfolios generally include a mix of securities representing each of these asset classes in varying proportions. A portfolio’s asset allocation refers to the percentage of assets that is allocated to each class, and is influenced by the portfolio’s risk/reward profile and objective.

Equities

Equities, or stocks, are sold as shares that represent partial ownership of the issuing company. If the company does well and the price of its stock goes up, the shareholders’ investment will increase in value. Consequently, if the price declines, shareholders will lose money. While equities offer the highest potential for investment appreciation, the risks associated with equity investing are generally greater than with other investment types.

Equities can be classified as follows:
  • Domestic Large Cap Equities – Stocks of issuers in large capitalization companies (market capitalization of $5 billion or more) that have an established record of revenue growth and profitability and are located in the United States.
  • Domestic Mid Cap Equities – Stocks of issuers in mid-capitalization companies (market capitalization between $1.5 and $5 billion) and are generally believed to be positioned for further growth in revenues, earnings $ assets, and are located in the United States.
  • Domestic Small Cap Equities – Stocks of issuers in small capitalization companies (market capitalization of < $1.5 billion) that are generally believed to be positioned for growth in revenues, earnings and assets and are located in the United States.
  • International Equities – Stocks of companies in foreign nations.
  • Emerging Markets Equities – Stocks of issuers in developing market countries.


Fixed Income

Fixed income includes the bonds of domestic and foreign corporations, the U.S. Treasury and other U.S. government entities, foreign governments and other debt issuers. These types of securities represent a loan or debt owed to the investor. Bonds typically pay a fixed rate of interest income for a set period of time. When the bond matures at the end of the time period, the face value, or principal, is returned to the investor. Fixed income securities increase and decrease in value in direct opposition to current interest rates. These investments typically exhibit a lower level of risk than equities, and thus their returns are generally lower as well.

Bonds include the following categories:
  • High Yield Debt – High-yield bond portfolios concentrate on lower-quality bonds, which are riskier than those of higher-quality companies. These portfolios generally offer higher yields than other types of portfolios, but they are also more vulnerable to economic and credit risk. These portfolios primarily invest in U.S. high-income debt securities where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor's or Moody's at the level of BB (considered speculative for taxable bonds) and below.
  • High Quality Debt – High-Quality bond portfolios invest in a broad range of investment grade securities with a term to maturity of 1 to 10 years, including U.S. government and corporate debt securities, mortgage and asset-backed securities and international U.S. dollar-dominated bonds.
  • International Debt – Bonds of companies and governments in any nation with the exception of the United States.
  • Emerging Markets Debt – Emerging Market bond portfolios invest more than 65% of their assets in foreign bonds from developing countries. The largest portion of the emerging-markets bond market comes from Latin-America, followed by Eastern Europe, Africa, the Middle East, and Asia.

Cash Equivalents/Money Market Instruments

Money market instruments pay either a fixed or variable rate of income for a short duration, and return the principal to the investor when the time period has passed. Money market securities include treasury bills, certificates of deposit of large banks and commercial paper, as well as short-term IOUs of large US corporations. These securities generally mature in less than 270 days and offer the lowest risk/return ratio.

Diversification does not assure a profit or protect against market loss.

Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. These risks may be magnified in emerging markets. Within each asset class, the portfolios may also allocate their investment in different types of securities, such as growth and value stocks, real estate investment trusts, corporate bonds, and U.S. government bonds. There are risks associated with investments in each of these asset classes, which are described more fully in the prospectus and in Legend Advisory Corporation's Form ADV Part 2A Brochure. The two main risks related to fixed-income investing are interest rate risk and credit risk. Please note, as interest rates rise, existing bond prices fall and can cause the value of an investment to decline. Changes in interest rates have a greater effect on bonds with longer maturities than on those with shorter maturities. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and/or interest payments.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment as $1.00 per share, it is possible to lose money by investing in the fund.

Before investing in a mutual fund, consider its investment objectives, risks, charges and expenses carefully. The prospectus, which contains this and other information about the mutual fund, can be obtained by contacting Legend Equities Corporation. Please read the prospectus carefully before you invest or send money.