If you’re new to investing, you might find yourself asking, “What is an asset class?” In short, there are multiple kinds of investments and when a group of them share similar characteristics, they can be considered an asset class. One particular class of assets is likely to have different levels of risk and return from another class, and they are likely to perform differently from each other in the market.
Financial advisors often try to include investments from multiple types of asset classes in a portfolio. That’s because portfolio diversification can help to reduce your exposure to unsystematic risk. This is the type of risk that’s unique to a specific company, industry, or place. Unsystematic risk can occur if new regulations threaten the future of a particular industry; it can also happen at a company level if, say, there is reporting of corruption within the company.
Although all investing comes with some risk, diversification in your portfolio’s asset classes distributes your money in a way that might reduce your vulnerability and mitigate unsystematic risk. There are the traditional asset classes you may have heard about already and some new additions to the list.
List of Different Asset Classes
• Stocks (equities): Each share of stock is a single ownership share in a publicly-traded company, meaning a company that trades on a stock exchange. You can receive dividends from stocks if a company pays out part of its profits, or you might get capital gains when you sell if the price of the stock has risen.
• Bonds (fixed income): These are loans you make to a company or government for a predetermined amount of time at a certain amount of interest. These include Treasury bonds, corporate bonds, municipal bonds, and mortgage- and asset-based bonds.
• Money market accounts or cash equivalents: When you put money into a money market account, or a savings account, or certificate of deposit, then you’re lending money to the financial institution, and you get paid interest on the money.
• Real estate : This can involve buying real estate for the purposes of renting the property to generate income or to earn profits as the value of the property appreciates. Some experts would move real estate up to the traditional asset list .
• Commodities : Some investors put money into metals, energy products, livestock, agricultural products, and so forth. A common way to do this is through what’s called a futures contract. This is an agreement to buy or sell a certain commodity at a specific quantity at a predetermined price at a later time.
• Cryptocurrencies: This involves investing in digital currency that can only be used online. This is a direct financial exchange between users, with no involvement from a bank or other third party. Bitcoins are a popular form of cryptocurrency. These assets are risky and have a short track record, so investors should exercise caution before buying.
There are subgroups within these classes that have similar characteristics. Subgroups could include stocks from a certain industry or company size, or a particular kind of real estate , such as residential, commercial, or retail.
There are 11 different stock sectors , such as financials, energy, technology, and so forth—and each sector can be further subdivided. Stocks can also be divided into those priced for growth, and those selected for value. Some funds are large-cap focused, while others focus on small or mid-sized companies. The point is that broad categories of asset classes can be divided and subdivided, creating significant options for investors.
There are also alternative types of investments:
• Real estate investment trust (REIT): REITs invest primarily in real estate or real estate loans and are traded like stocks.
• Gold: You can invest in gold and other precious metals directly by buying the metal as coins or bars, or using exchange-traded funds (ETFs) that invest in bullion.
• Peer-to-peer investing: New regulations have made it easier for private companies to raise money from individual investors.
Sometimes, it can be challenging to precisely pigeonhole an asset . For example, exchange-traded funds (ETFs) can defy clear classification. ETFs are traded on the exchanges, which makes them similar to stocks, but ETFs can contain investments from multiple asset classes, which puts them into a category all their own. Investors need to make sure they know what types of investments are contained in the ETF’s holdings so they can properly allocate amongst them.
Plus, some financial analysts consider domestic investments to be in a different asset class from foreign ones. Fortunately, you don’t have to be able to clearly classify each asset into a hard and fast class to invest in them as part of your diverse portfolio.
Which Asset Classes Are Right for You?
Basically, it depends. When thinking about which asset classes you should invest your money in, it might help to consider your unique goals.
Goals-based investing is an investment approach that, rather than looking at marketing benchmarks, focuses on what you need your money for and when you’ll need your money. It allows you to plan for different goals (retirement, house down payment, kids’ college) using different investment strategies. You may also hear it called goals-driven investing. To invest according to this philosophy, it’s key to know what your goals are, both short term and long term.
Traditional investment strategies measure risk tolerance and look at portfolio returns. Using that information, you’d decide how you wanted to invest and what your portfolio should look like.
Remember that the decision you make on which asset classes you want in your portfolio isn’t a final one. Things change and so can your portfolio.
Your portfolio could include investments in multiple asset classes, each with their own levels of risk and return. Over time, assets have returns and losses, which means the value of each asset changes.
Portfolio rebalancing is part of investing, and simply means adjusting your investments—i.e., making changes to them so asset allocation continues to fit your goals and risk tolerance. Rebalancing also gives you a great opportunity to review what’s in your portfolio and make sure that’s still where you want to invest.
Where Should You Start?
How you should invest typically depends on multiple factors, including your personality, your risk tolerance, and how actively you want to be involved. You can gain quick insights into what type of investor you might be with this online quiz.
SoFi offers both automated and active investing depending on how hands on you want to be. If you choose SoFi automated investing, SoFi will build and manage your portfolio without charging you a management fee.
Plus, SoFi can help you to create a plan that targets multiple goals, rebalance your investments quarterly, diversify your portfolio across different kinds of financial investments, and give you access to member services.
With SoFi active investing, you can invest in what you love, trade stocks of brands you know and believe in, and discover new opportunities based on your interests along the way—and pay zero fees.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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