One way you can make your money work for you is by investing it. However, most new investors have some degree of apprehension towards investment primarily because of the complexity of asset classes and asset diversification.
Getting bombarded with “promising” financial products by proclaimed financial experts does nothing to simplify investment decisions. So, should you choose to invest in equity, a mutual fund, or Bitcoins?
Having a basic understanding of financial products is the first step towards making sound investment decisions. It does not get more basic than asset classes. You can also opt for a wealth-building app like GuardianWealth. What makes their app special is you have a digital advisor that personalizes and guides you on your path to wealth creation. Its all-in-one personal finance app helps you budget, save and invest all while building your financial knowledge.
In this article, we define asset classes and highlight the various asset class classifications. We will also look at the characteristics and financial products in each asset class. Finally, we will highlight the general factors to consider before choosing to invest in any financial product.
An asset class is a group of financial products/ investments that share similar traits. Such traits include:
The financial products in an asset class respond in more or less the same way to the driving forces of the economy.
Some asset classes have a higher risk than others, while other asset classes have higher returns than others.
Others yield returns in the short-term while for others, you will have to wait for the long-term.
Understanding the behavior of each asset class will help you make sound investment decisions and meet your financial goals. Let us get started on the types of asset classes.
There are six main types of asset classes as listed below:
Fixed-income refers to debt securities whereby a borrower gets money from a lender and pays back in fixed interest. The most common financial product under the fixed-income asset class is a bond.
Bonds are debt instruments created either by corporations or government agencies. Corporations issue bonds primarily to raise capital. Government agencies, on the other hand, issue bonds to increase money supply and encourage economic activities like lending and investment.
The interest rate on bonds is set by the body that issues the bond. The interest against the borrowed bond is called a coupon and is paid to the lender regularly. The principal value of the bond is, however, repaid on the bond’s maturity date.
The financial products in the fixed-income asset class include:
The fixed-Income asset class is defined by the following common characteristics.
Equity/stocks investment involves buying shares of ownership from a company. An investment in equity or stock gives you percentage ownership of the trading company.
You can either opt to invest in public equity (issued by a public traded company) or private equity. Note, however, that only public equities or sock are normally traded in the stock exchange. They are, therefore, easier to liquidate.
Equity investment earns one dividend. The types of dividend earned from Equity asset class financial products include:
The financial products that fall under the if equity asset class include;
Financial products under the equity asset class share the following characteristics.
The cash asset class encompasses all forms of liquid cash. These include cold cash, money in savings accounts, funds in online wallets, and assets that are easily converted to hard cash without losing value.
Cash is the most popular asset class because it is easily accessible. The liquidity of cash and its equivalents is its strongest attraction.
Financial products that fall under the cash asset class share the following traits.
In a nutshell, cash is a defensive asset. However, it is susceptible to inflation. Second, cash deposits if withdrawn early attract a penalty.
The real estate/property asset class encompasses all physical spaces including land lots, commercial buildings, residential houses, warehouses, and business parks.
One can invest in real estate either by buying a property directly or by buying into a Real Estate Investment Trust (REIT). REITs are like mutual bonds in that people pool together to buy properties.
One thing to note with REITS is that changes in the pool membership affect one’s share in the asset investment.
Real estate is considered the most tangible investment because one can see where their money went. However, the real strength of the real estate asset class is protection against inflation. That is because the value of real estate assets increases even during inflation.
Be that as it may, real estate remains a highly volatile asset class. It is affected by changes in the economy, government policies on construction and property ownership, demographics, and socio-economic factors.
In summary, the real estate asset class:
The commodity asset class mainly includes raw materials and agricultural produce to which value can be added. These include petroleum products, precious metals like gold and silver, lumber, cash crops, and food crops.
The commodity asset class is popular because it can easily be converted to other assets like cash and stock. Second, it is also viewed as a protection hedge against inflation.
The commodity asset class features the following characteristics.
Commodity assets are regarded as short-term to medium-term investments. They are also highly volatile.
The Futures or alternative asset class cover non-traditional financial products. Financial products under the futures asset class include:
Futures investment options feature the following characteristics.
Alternative investments will tie your money for a long time.
We cannot talk about classes without mentioning these two phrases.
An asset portfolio refers to an overarching view of all one’s investments. Asset allocation, on the other hand, is a strategy employed to allocate investments in an asset portfolio.
Asset allocation aims to reduce risk while maximizing returns for the investor. It does so by incorporating financial products across different asset classes and industries in an asset portfolio.
An ideal asset portfolio should be tailored to meet your financial situations, financial goals, and personality. Below are basic factors to consider when adding investment products from various asset classes to your asset portfolio.
Every asset class bears some degree of capital risk. However, some ranker higher on the risk ladder than others. Consider your risk appetite or tolerance; how great a risk are you willing to take for financial freedom. It’s also important to note that stock market investments account for the majority of wealth created by U.S. households.
Be honest with yourself in your risk profile/screening. If you are not ready for risky investments, consider low-risk to medium-risk asset class investments.
What is the aim of your investment? Is it to earn you a steady source of income, save for vacation or grow your wealth?
Based on your answer you can either opt for defensive assets or growth assets. Defensive assets, such as those in the fixed interest asset class, are low-risk, short-term, and include regular income. If you are set to grow your wealth then, growth asset classes like stocks and alternative assets is a better option. To invest based on your financial goals, you should check out GuardianWealth’s all-in-one personal finance app that helps you save and invest based on your financial goal. With this app, a digital advisor creates a portfolio based on your goals, taking into consideration the factors detailed in this article.
Consider factors like your age and health. Ensure the projected date of asset maturation sits right with you.
All asset classes bear some degree of risk. However, higher risk and a longer wait often translate to higher returns.
Fortunately, you do not necessarily have to settle for one asset class. Mix them up to meet both your short-term and long-term financial goals.
Choose wisely and let your money work for you while you sleep.