4 Min Read | Published:May 8, 2024
Understanding major asset classes can help you to make investment decisions. See diversification strategies that can help you create a balanced portfolio.
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
At-A-Glance
Asset classes are groups of investments that share similar characteristics.
Three main asset classes are equities (stocks), fixed-income investments (bonds), and cash (and equivalents).
Balanced investment portfolios typically contain investments from multiple asset classes.
Creating a balanced investment portfolio requires knowledge of how investments work. A good understanding of asset classes is an important part of creating a balanced portfolio and determining which assets to invest in.
In this article, we’ll take a look at different major asset classes. We’ll also talk about risk and how it factors into your investment and financial planning strategies.
What Is an Asset Class?
An asset class is a grouping of investment vehicles that share similar characteristics. Three main asset classes are equities (stocks), fixed-income investments (bonds), and cash (and equivalents). Financial advisors help clients to diversify their portfolios by investing in assets from different asset classes.1
Types of Asset Classes
The list of asset classes and sub-classes has grown in recent years with the launching of new financial products. Historically, there have been three main asset classes: stocks, bonds, and cash (and equivalents). Today, many investment professionals include more investments in the asset class mix.
They are listed below, along with their relevant sub-classes that are commonly used in portfolio construction:
- Cash and Cash Equivalents: Savings, treasury bills, and money market accounts are examples of cash and cash equivalents. The common denominator for each of these is their liquidity. They can provide cash any time you need it.2
- Fixed Income Securities: These are a preferred investment for risk-averse individuals or companies. Bonds are a fixed-income security. They provide a steady fixed income, typically without the risk associated with equities.3
- Stocks and Equities: Stocks, also known as equities, are shares of publicly traded companies that are traded on stock exchanges such as the NYSE (New York Stock Exchange).4
- Alternative Investments: This asset class has expanded in recent years. Alternatives include the following sub-asset classes, although some investors may consider these subclasses to be standalone asset classes:
- Real Estate
- Foreign Currency (FOREX)
- Cryptocurrency
- Hedge Funds
- Private Equity Funds
- Commodities (gold, silver, energy, and agriculture)
- Options / Derivatives
- REITs
- Hard assets (art, stamps, wine, etc.)
Some of these are high-risk, complex investments. It’s advisable to speak with a professional financial advisor if you’re considering any alternative investment.
Diversification Strategies
There are several schools of thought on how to diversify your portfolio. Modern portfolio theory (MPT), developed in 1952, is one popular passive investing strategy that is still in use today. MPT is a method for selecting potential investments in order to maximize their returns within a given level of risk.5 Although post-modern portfolio theory (PMPT) is an attempt to improve MPT by minimizing downside risk,6 (a term for the risk of a loss in an investment, as opposed to the symmetrical likelihood of a loss or gain).7
No matter which theory you subscribe to, there are some universal tips for investors who are looking to diversify their portfolios.8
- Don’t put all of your money into one stock or sector.
- Consider adding in index funds or fixed-income funds.
- Continually add to your investments.
- Know when to exit.
It’s important to make investment decisions based on your risk tolerance.
Frequently Asked Questions
The three main asset classes are equities, fixed income, and cash equivalents. However, there are additional investments that may also be considered asset classes today.
An alternative investment is any investment that doesn’t fit into the other main asset classes. Examples include foreign currency (FOREX), cryptocurrency, hedge funds, private equity funds, options, REITs, and collectibles like stamps, art, and wine.
The Takeaway
Different investments can be broken up into asset classes. Asset classes can also be used to help diversify an investment portfolio. Understanding how asset classes work is an important part of making informed investment decisions.
1,3,4 “What Are Asset Classes? More Than Just Stocks and Bonds,” Investopedia
2 “Asset Class,” Corporate Finance Institute
5,6 “Modern Portfolio Theory (MPT),” Investopedia
7 “Downside Risk: Definition, Example, and How To Calculate,” Investopedia
8 “5 Tips for Diversifying Your Portfolio,” Investopedia
Kevin D. Flynnis a financial services provider, business coach, and financial writer. He lives in Leominster, Massachusetts, with his wife Evelyn, two cats, and ten wonderful grandchildren.
All Credit Intelcontent is written by freelance authors and commissioned and paid for by American Express.
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