Asset Classes

The term Asset Class refers to a broader investment category consisting of financial assets with similar attributes. Having knowledge about all financial classes is a must for every modern investor, as it will allow them to make a proper asset allocation depending on the their financial goals, risk tolerance and current market conditions. Most investors prefer to invest in more than one asset class, for diversification purposes. There are several major asset classes and we have described them below.

Cash Asset Class (Cash and Cash Equivalents)

The Cash Asset Class includes cash (in form of currency) and other cash equivalents like certificates of deposit (COD), money markets, commercial paper and treasuries. The cash asset class is considered to be low-risk and is best suited for conservative investors hose main goal is to preserve their capital. However the return on the cash asset class is rarely enough to offset inflation and taxes.

Fixed Income Asset Class (Bonds)

If you want to receive fixed income then investing in bonds might server you well. A bond is “IOU” note, and can be issued by governments and corporations. Investors loan money to governments and companies when they buy their bonds. The investors then receive fixed interest on their bonds. The bonds can be short-term, long-term, domestic or foreign. Depending on their quality bonds can be investment grade bonds, high-yield (usually called junk bonds) or anywhere in between.

Stocks Asset Class

Another popular investment asset class is stocks. Stocks, also called equities, represent ownership in a corporation. The stocks asset class is very broad and includes large-cap, mid-cap and small-cap stocks. Some stocks are considered value stocks, while other are considered growth stocks. In general the stock asset class is riskier compared to the cash and fixed-income asset classes.

Real Estate Asset Class

Real Estate is the largest asset class in the world and is very familiar to most investors. Most people mistakenly think of their own house as an investment, while in most cases their own house is simply a liability (unless they fully own it). Investors interested in the Real Estate Asset Class can invest in Real Estate Investment Trusts or buy rental income properties. Real Estate asset class is highly cyclical, and every great boom like the one we had in the beginning of 21st century is followed by bust.

Commodities Asset Class

Many people do not consider commodities to be an asset class, but nevertheless the commodities are the best performing asset class since the beginning of 21st century. Commodities are raw materials like petrol, gas, agricultural products (wheat, corn, cattle), and metals like iron, copper and aluminum. Commodities offer superior hedge against inflation and their prices tend to rise in a high inflation environment. You can invest in commodities by buying shares in commodity producers, or by investing in financial products that track commodity futures indexes like Dow Jones AIG Commodity Index. Investing part of your portfolio in commodities provides diversification, because the returns of this asset class are relatively independent of stock and fixed-income asset classes returns.

Precious Metals Asset Class (Gold and Silver)

More and more people consider precious metals to be an asset class independent of commodities. This is largely due to the fact that precious metals, specifically gold and silver have been the only sound and honest money used throughout history. With fiat currencies losing their purchasing power day after day, paper financial assets crashing and real estate bubble deflating worldwide, investors have little choice but to invest in in commodities and real money (gold and silver). Learn how to hold gold in your RRSP account.