You may have encountered the terms “assets” and “asset classes” when reading about investments and finance.
But do you really understand how assets are classified and what are the main classes of assets?
In this article, we will explore how assets are classified and what the main classes of assets are.
Asset allocation is the most important decision an investor can make with his or her investment. Having an understanding of asset classes and how the right mix of these assets in a portfolio can help you achieve your financial goals can be key.
What Is An Asset Class?
Any group of securities that exhibits similar characteristics, is subject to the same laws and regulations and has similar behavior in the market place is said to be an asset class.
What Are The Main Asset Classes?
Investment professionals consider the following to be the main asset classes
- Fixed income
- Cash Equivalents
- Money Market Instruments
In addition, some investment advisors may also add real estate, commodities as well as other types to the asset class list.
Asset Class Types
Again, the most quoted asset classes are the following
- Equities, or stocks
- Bonds, or fixed-income securities
- Cash, or marketable securities;
These classes are also the most liquid asset classes
As I stated above, you also have some alternative asset classes such as
- Real estate,
- Tradable collectibles.
You also might find analysts refer to an investment in hedge funds, venture capital, crowdsourcing or even bitcoin as examples of alternative investments.
In general the more “alternative” an investment, the less liquid it will be.
Illiquidity does not speak to return potential though.
Having an asset of less liquidity only means there may be a greater wait to find a buyer to convert the asset to cash. Such as this blog business I am building. I can’t think of anything that would be less liquid and it worries me a little, but I enjoy writing on the subject and have no intentions on selling the website any time soon.
Asset Classes and Portfolios
Financial advisors often mix together asset classes and asset class categories.
Investment vehicles are seen as asset class categories and used for diversification purposes.
Individual asset classes are expected to reflect different risk and return investment characteristics, and each behaves differently in any given market environment.
Maximization of return is achieved by reducing portfolio risk through asset class diversification.
Thus advisors will focus on asset class as a way to achieve portfolio diversification.
As you might expect different asset classes have different cash flows streams. They also have varying degrees of risk.
By Investing in several different asset classes the investor ensures a certain amount of diversity in his or her investments. Overall diversification reduces risk and increases return probability. How one chooses to diversify their accounts is dependent on their goals and risk tolerance. For myself I have a separate account for each of my goals and my distribution of funds is dependent on that. For example, my emergency fund is 60% bonds and 40% stocks. On the other hand with my kids’ education fund, I am much more aggressive and the majority is held in stocks.
Asset Class and Investing
So you can see asset classes provide a way for investors to achieve a sound asset allocation strategy.
Asset classes help diversify portfolios, minimize risk and increase the chance of returns.