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TRUMP UNIVERSITY WEALTH BUILDING 101

The three stock categories are:

1. Value stocks , generally defined as those with the lowest multiples of

price to earnings and book value.

2. Growth stocks , which tend to be of the fastest-growing companies, but
also the most expensive.

3. Blend stocks , which fall between the first two categories; these companies

grow faster than value companies, but are less expensive than growth
companies.
Morningstar, a leading provider of independent investment research, also
measures the risk of these nine categories. It ranks large-cap value, large-cap
blend, and mid-cap value as the three most conservative. This is the tradi-
tional turf of stocks and mutual funds that are meant to provide varying
degrees of growth and dividend income. The mid-level risk grouping is large-
cap growth, mid-cap blend, and small-cap value. The highest-risk group
consists of mid-cap growth, small-cap growth, and small-cap blend.
Morningstar developed a nine-box grid for bonds, too. The two key
characteristics are sensitivity to interest-rate swings and the bond issuers’
creditworthiness, which refers to the probability that the issuer will pay the
interest and return the principal to investors. Note, though, that default rates
are very low for most types of bonds.
The longer a bond’s maturity, the more the bond price will change with
interest-rate swings. The categories are short, intermediate, and long-term
maturity. High-quality bonds are those with credit-quality ratings at or above
AA. These are government bonds and the best corporate bonds. Medium
quality is from just under A to BBB. Below BBB (or nonrated) is low quality,
with higher yields.
Morningstar’s analysis of the relative risk of these nine bond categories
puts short-term high quality in the lowest rank. Moderate risk consists of
intermediate-term high quality, intermediate-term medium quality and short-
term medium quality. The riskier bonds are long-term low quality, long-term
medium quality, long-term high quality, intermediate-term low quality and
short-term low quality.

Careful diversification within the stock and bond allocations enables you
to avoid the possibility of large permanent losses while continuing to make
good money over time. In addition, if you limit each position to a modest
percentage of your nest egg, such as 5 percent for a stock and 15 percent for
solid mutual fund, you can relax and take the long-term view your invest-
ments deserve.

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