In the foggy world of finance, there is some argument about these asset classifications. Sometimes, like the income classes, they can blend together or cross over one another. However, here are the most definitive asset classes.
1. Stocks and equities.
2.Fixed income investments.
4.Real estate and tangible assets.
Stocks and equities
This is probably the most common asset class because it incorporates much of what people think of when they think of investing or retirement planning. Essentially, you purchase shares of a company, or equities, and profit either when these equities increase in value or are sold or through the distribution of dividends.
When you buy 1,000 shares of a stock, you’re buying into that company’s equity. Sometimes, these companies pay you a dividend of their profits as well. This is true for day trading, long term stock holding and even buying into a company as a venture capitalist.
Fixed income investments
This asset class most commonly comes in the form of bonds. For example, you purchase 100 10 year 10% bonds for $1,000. You have $100,000 in bonds that pays 10% interest until the bond matures and then you get the principal back as well.
Bonds, especially government issued bonds like Treasury bills and Municipal bonds, are good for post-retired folks because they’re considered safe and the income you derive from the interest is tax free. Or to put it another way, it’s passive income. There are higher yield bonds, called corporate bonds. These are the AAA and down ratings.
Cash equivalent investments include things like your savings account, money market accounts and other interest bearing accounts based on cash. This asset class is easily liquidated. They also tend to deliver very low returns. Just check the interest on your bank savings account to test this out.
Real estate and tangible assets
This is arguably the best asset class. Although not necessarily the highest performing over the short term, this class does offer the best blend of growth, tax advantage and wealth preservation of any of the classes. Part of the reason for this is that this class contains “real” assets – buildings, metals and land for example. This class isn’t based on paper but on something you can touch or hold in your hand. The assets in this class have intrinsic value.
Real estate sits at the forefront because when investing in income property, you benefit from cash flow, appreciation, equity buildup and tax benefits. Interestingly, precious metals come with some of the same advantages – tax benefits, appreciation and like real estate and land, precious metals are considered to have built in protection against recession.
This asset class consists of things like stock options, foreign currency exchange (Forex) and other commodities. Right away, you can see there could be some confusion here.
After all, stock options sound like stocks, commodities include things like pork bellies, orange juice and gold… so what’s the difference?
Well, here you’re really more of a speculator than anything. With stock options, you aren’t buying the stock, you’re gambling on its price shift and then buying the right to buy at a selected price. Foreign currency may or may not rise, so you buy it hoping it will. Vacant land could be considered a future, although it’s technically not since it’s a real asset.
While many people do speculate in precious metal futures, this is more often than not done through ETFs rather than actually buying and holding metal. It’s sort of like a stock option rather than a direct purchase.