Investor's wiki

Asset Class

Asset Class

What is an asset class?

An asset class is a group of securities that share comparable characteristics, perform comparably in the marketplace, and are governed by the same laws and regulations. Major asset classes include stocks, bonds, cash, real estate and commodities.
Alternative investments include art, stamps and other collectibles. Some analysts consider venture capital, bitcoins and hedge funds to be alternative assets too.

Deeper definition

Asset classes often are mixed together to diversify an investor's portfolio and reduce its volatility. Each asset offers different risk and return characteristics and responds differently in the market. Asset classes react differently to news. For example, a piece of news might be positive for stocks, negative for bonds, however not have any impact on cash or real estate.
Historically, stocks provide the highest return of all the asset classes yet in addition are the most volatile. While bonds and annuities provide lower returns than stocks, they're less volatile.
Cash and short-term liquid securities, for example, government issued securities and CDs, are considered the safest investment. Generally, real estate's value is more stable than that of stocks yet can likewise rise and fall sharply.
Investors select assets based on different factors, including growth, value and income. Some investors analyze the investment's performance or valuation metrics like the price-to-earnings (P/E) ratio or earnings per share (EPS).
Other investors seek out particular types of assets, based on the asset's behavior in certain environments. Since investments inside a certain asset class behave in much the same way, they normally offer comparable cash flow.
Generally, alternative assets are less liquid. These assets often take longer to sell. However, an asset's lack of liquidity does not reflect its potential return.

Asset class example

Chris has $100,000 and needs to diversify his portfolio to reduce its volatility. With help from his financial adviser, he invests $40,000 in stocks, $20,000 in bonds and $20,000 in short-term CDs while putting $20,000 down on an investment property. Chris is presently invested in four asset classes.
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  • Equities (e.g., stocks), fixed income (e.g., bonds), endlessly cash equivalents, real estate, commodities, and currencies are common examples of asset classes.
  • An asset class is a grouping of investments that exhibit comparable characteristics and are subject to the same laws and regulations.
  • Financial advisors center around asset class as a method for helping investors diversify their portfolios.
  • There is normally very little correlation and in some cases a negative correlation, between different asset classes.


Why Are Asset Classes Useful?

Financial advisors center around asset class as a method for helping investors diversify their portfolios to maximize returns. Investing in several different asset classes ensures a certain amount of diversity in investment selections. Each asset class is expected to reflect different risk and return investment characteristics and perform differently in some random market environment.

Which Asset Class Has the Best Historical Returns?

The stock market has proven to produce the highest returns over extended periods of time. Since the late 1920s, the CAGR (compounded annual growth rate) for the S&P 500 is around 7.63%, expecting that all dividends were reinvested and adjusted for inflation. In other words, one hundred dollars invested in the S&P 500 on Jan. 1, 1920, would have been worth about $167,500 (in 1928 dollars) by Dec. 31, 2020. Without adjusting for inflation the total would have developed to more than $2.2 million out of 2020 dollars. By comparison, the same $100 invested in 10-year Treasuries would have been worth just a little more than $8,000 in today's dollars.

Historically, the three primary asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix.