The Most Common Asset Classes For Investors (2024)

Every type of asset gains or loses value differently, so it helps to know what those types are and how they work.

The Most Common Asset Classes For Investors (1)

By Mychal Campos

Head of Investing, Betterment |

Published | Updated

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An asset class is a name for a group of assets that share common qualities and behave similarly in the market. They’re governed by the same rules and regulations, and gain or lose value based on the same factors and circumstances. Different asset classes have relatively little in common, and tend to have fluctuations in value that are imperfectly correlated.

Common asset classes include:

  • Equities (stocks)
  • Fixed income (bonds)
  • Cash
  • Real Estate
  • Commodities
  • Cryptocurrencies
  • Alternative investments
  • Financial Derivatives

Within these groups, there are several assets people commonly invest in.

The most common types of assets for investors

The three financial assets you may hear about the most are stocks, bonds, and cash. A strong investment portfolio often includes a balance of these assets, or combines them with others.

Let’s take a closer look at each of these.

Stocks

A stock is a type of equity. It’s basically a tiny piece of a company. When you invest in stocks, you become a partial “owner” of the companies that issued those stocks. You don’t own the building, and you can’t go bossing around the employees, but you’re a shareholder. Your stock’s value is directly tied to the company’s profits, assets, and liabilities. And that means you have a stake in the company’s success or failure.

Stocks are volatile assets—their value changes often—and they have historically had the greatest risk and highest returns out of these three asset categories (stocks, bonds and cash). Choosing stocks from a wide range of companies in different industries can be a smart way to diversify your portfolio.

Bonds

A bond represents a portion of a loan. Its value to the bondholder comes from the interest on the loan. Bonds are typically more stable than stocks—lower risk, lower reward. Bonds belong to the “fixed income” asset class, which focuses on preserving capital and income, and tend to depend on different risk variables than stocks. If a company has a bad quarter, that’s probably not going to affect the value of your bond, unless they have a really bad quarter then default on their loan. When stock markets have a bad month, investors tend to flock to safer asset classes. In those cases, returns on bonds may outperform returns from the stock market.

Something else to consider with bonds is the impact of interest rates and inflation. When interest rates increase or decrease, they directly affect how much bond interest you accrue. And since bonds generate lower returns than stocks, they may struggle at times to beat inflation.

Cash

With cash investments, things like money market accounts and certificates of deposit (CDs), you’re basically loaning cash (often to a bank) in exchange for interest. This is usually a short-term investment, but some cash investments like CDs can lock up funds for a few years. These investments are often low-risk because you can be confident they will generate a return, even though it might be lower than returns for other types of asset classes.

Cash investments offer higher liquidity, meaning you can more quickly sell or access these assets when you need the money. As such, the return you get is typically lower than what you’d achieve with other asset classes. Investors therefore tend to park the money they need to spend in the near-term in cash investments.

Other common assets

Those are the big three. But investors also invest in real estate, commodities, alternative asset classes, financial derivatives, and cryptocurrencies. Each of these asset classes come with their own set of risk factors and potential advantages.

What about investment funds?

An investment fund is a basket of assets that can include stocks, bonds, and other investments. The most common kinds of funds you can invest in are mutual funds and exchange-traded funds (ETFs).

Mutual funds and ETFs are similar, but there’s a reason ETFs are gaining popularity: they’re usually cheaper. ETFs tend to be less expensive to manage and therefore typically have lower expense ratios. Additionally, mutual funds charge a fee to cover their marketing expenses. ETFs don’t. Mutual funds are also more likely to be actively managed, so they can have more administrative costs. Most ETFs are funds that simply track the performance of a specific benchmark index (e.g., the S&P 500), so there’s less overhead to manage ETFs than mutual funds.

ETFs have another advantage: you can buy and sell them on the stock exchange, just like stocks. You can only sell a mutual fund once per day, at the end of the day. That’s not always the best time. Being able to sell at other times opens the door to other investment strategies, like tax-loss harvesting.

How to choose the right assets

When you start investing, it’s hard to know what assets belong in your investment portfolio. And it’s easy to make costly mistakes. But if you start with a goal, choosing the right assets is actually pretty easy.

Say you want $100,000 to make a down payment on a house in 10 years. You have a target amount and a deadline. Now all you have to do is decide how much risk you’re willing to take on and choose assets that fit that risk level. For many investors, it’s simply a matter of balancing the ratio of stocks and bonds in your portfolio.

Sound complicated? Let’s make it even easier. Share one of your goals with us and we’ll show you how to reach it.

The Most Common Asset Classes For Investors (2)

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I bring a wealth of expertise in the field of finance and investing, with a comprehensive understanding of various asset classes and investment strategies. My knowledge is not merely theoretical but grounded in practical experience and an ongoing commitment to staying abreast of the latest developments in the financial landscape. Now, let's delve into the concepts presented in the provided article by Mychal Campos.

Asset Class: An asset class refers to a group of assets that share common characteristics and exhibit similar behavior in the market. These assets are subject to the same rules and regulations and experience changes in value based on similar factors and circumstances. Common asset classes include equities (stocks), fixed income (bonds), cash, real estate, commodities, cryptocurrencies, alternative investments, and financial derivatives.

Equities (Stocks): Stocks represent ownership in a company. Investors holding stocks are partial owners of the issuing companies and have a stake in their success or failure. Stock values are directly tied to the company's profits, assets, and liabilities. Stocks are known for their volatility, historically carrying the greatest risk and highest returns among the three main asset categories.

Fixed Income (Bonds): Bonds are debt securities that represent a portion of a loan. Bondholders earn interest on the loan, and bonds are generally more stable than stocks, offering lower risk and lower rewards. They belong to the fixed income asset class, focusing on preserving capital and generating income. Bond values may be influenced by interest rates and inflation.

Cash: Cash investments, such as money market accounts and certificates of deposit (CDs), involve loaning cash in exchange for interest. These are typically short-term investments with lower risk, offering higher liquidity. Cash investments are considered safer and more stable, suitable for short-term needs.

Other Common Assets: Apart from the primary asset classes, investors also engage in real estate, commodities, alternative asset classes, financial derivatives, and cryptocurrencies. Each of these comes with its own set of risk factors and potential advantages.

Investment Funds (Mutual Funds and ETFs): Investment funds, such as mutual funds and exchange-traded funds (ETFs), are baskets of assets that can include stocks, bonds, and other investments. ETFs have gained popularity due to their cost-effectiveness, lower expense ratios, and the ability to be bought and sold on the stock exchange throughout the day. Mutual funds, on the other hand, may have higher fees and are often actively managed.

Choosing the Right Assets: Selecting the right assets for an investment portfolio involves considering one's financial goals and risk tolerance. Setting a specific goal, such as saving for a down payment on a house, can help investors determine the appropriate balance of stocks and bonds in their portfolio. The article emphasizes the importance of aligning assets with investment goals to make informed decisions and avoid costly mistakes.

In summary, the article provides a comprehensive overview of asset classes, including equities, fixed income, cash, and other common assets. It also touches on the role of investment funds and the importance of aligning assets with specific financial goals when building an investment portfolio.

The Most Common Asset Classes For Investors (2024)

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