Takeaways
- The risk and reward profiles of the underlying securities group asset classes.
- Financial assets include cash, stocks, bonds, real estate, crypto, ect.
- Conservative investors invest in assets that prioritize capital preservation.
- Investors who want high returns look toward equities and alternative assets.
- Investors, financial advisors, estate planners, and finance professionals try to optimize portfolios by balancing the right degree of risk and return based on your money goals.
What Is an Asset Class?
Asset classes are groups of financial instruments that behave similarly and share common traits. They are separated based on characteristics like return, risk, and liquidity. Investors mainly separate assets into classes to adequately understand how to diversify their portfolios’ exposure, balancing risk, return, and resilience. You should invest in different types of asset classes to do the same.
Each asset class will respond differently to market fluctuations, macroeconomic conditions, inflation, and more. The fundamental differences in behavior, the underlying collateral of securities (e.g., real estate is tied to a physical structure and commodities to physical minerals), and liquidity create unique opportunities and risks associated with each asset class.
For example, equities (or stocks) typically perform well during periods of significant economic growth. These securities represent a financial claim on a business. So, if you own a piece of Apple stock and the company performs well, the value of your stock increases. On the other hand, fixed-income assets like certificates of deposits will help provide stability to your portfolio during market downturns or significant economic volatility because the bank or credit union that issues these securities guarantees a fixed interest payment at the end of the term.
By spreading your investment capital among multiple asset classes, you can mitigate potential losses while boosting the chances of reaching your long-term target investment or net worth goals.
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How Are Asset Classes Used?
Assets classes are used mainly to ensure investment diversification and risk management.[1] The three main asset classes are stock, bonds, and cash. However, there are more asset classes to consider (more on this later).
A well-designed investment strategy utilizes varying allocations for each asset class. Investment strategies rely on a mix of asset classes to reach specific investment goals.
For instance, if you are an older or more conservative investor, you might want a higher allocation of cash and fixed-income securities to focus on generating passive income and preserving the capital you have accumulated for your retirement savings.
However, if you are a beginner investor or more aggressive investor, you might focus more heavily on researching publicly traded companies in stock markets like the Nasdaq or NYSE to gain higher returns and overall growth while shouldering a higher level of risk.
Retail and institutional investors can adopt different investment strategies to generate their desired returns. For example, a stock trader might focus exclusively on trading stocks. While a hedge fund can adopt a heavily concentrated portfolio in cryptocurrency to generate outsized investment returns for its clients.
You must focus on titrating the right balance of asset allocation when trying to create a functional, resilient investment portfolio. You will need to consider factors like your personal risk tolerance, financial goals, and the time horizon for meeting those money goals.
Let’s look at the various asset classes you can invest in. You can purchase most of these through your online stock brokerage account.
7 Types of Asset Classes
Whether working with a financial advisor or financial planner or taking the DIY (do it yourself) approach to investing, getting the right asset mix to generate the return you want is critical. Before you invest in any asset class, do your research. Here are seven common asset classes to invest in:
1. Cash and Savings
Cash and savings accounts are the most liquid of all asset classes. They provide easy access to funds with minimal risk and include things like physical cash, interest-bearing savings and checking accounts, and money market accounts. Each of these assets has low returns due to their stability but are critical assets for short-term expenses or emergencies. However, during times of rising inflation or when the Federal Reserve raises the federal funds rate, investors flow to these low-risk investments because they generate interest income.
The safety and liquidity of this class make it a foundational element of any diversified portfolio, specifically for risk-averse investors. This is why personal finance professionals evangelize saving cash for your emergency or slush funds in a savings account.
Best For: Conservative Investors, Capital Preservation
Types: Cash, High Yield Checking Accounts, High Yield Saving Accounts
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2. Equities
Equities, also known as stocks, represent partial ownership in a company. When you buy shares in a company, you become a partial owner and can not only vote on company matters but also benefit from the company’s growth. Stocks are considered high-risk but also have the potential for higher returns.
When you zoom out to the long-term, publicly traded stocks tend to outperform most other assets. For example, an investment in the S&P 500 has yielded a 10.32% annual return.[2] A significant drawback is that they are subject to market volatility.
Accredited investors can invest in early-stage companies that offer illiquid stock. Volatility is not much of a concern for these investments. However, investments in private companies are riskier due to their illiquidity and company performance.
Best For: Early-Stage Investors, Long-term portfolio growth, Dividend Income
Types: Common Stock, High-Yield Dividend Stocks, Mutual Funds, Target Date Funds
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3. Fixed-Income
Fixed-income assets are securities that pay investors regular interest payments and repayment of principal at maturity. They are usually considered among the lowest-risk assets and are more predictable than equities.
These investments are preferred by investors trying to build a passive income stream. For example, if you are trying to achieve financial independence or are retiring early, you might want to replace your regular income with interest income. Fixed-income securities like bonds or certificates of deposit can help you achieve this goal. In fact, you can build a bond ladder or CD ladder to help you maintain a constant stream of interest income.
Best For: Income Portfolios, Retirees, Capital Preservation
Types: Certificates of Deposits, U.S. Treasury Bills, Corporate Bonds, Municipal Bonds
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4. Cryptocurrencies
Cryptocurrencies are digital assets that rely on complex cryptography to secure the networks and verify transactions.[3] Bitcoin was the first and remains the most well-known, but many other cryptocurrencies exist.
These currencies operate with decentralized ledgers using blockchain technology and are considered speculative investments, with some of the highest risk and volatility of all assets. However, in 2024, the Securities and Exchange Commission blessed cryptocurrencies to be traded on Bitcoin ETFs.[4] Since then, there has been a flood of investment into this asset class, and several cryptocurrency exchanges have exploded in popularity.
Best For: Younger Investors, Higher Risk Investors
Types: Bitcoin, Ethereum, Bitcoin ETFs
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5. Real Estate
Real estate investing involves purchasing physical property, such as residential, commercial, or industrial buildings or tracts of land. Investors gravitate toward real estate because this asset class produces rental income, capital appreciation, and tremendous tax advantages. Real estate investments are a proxy for hedging against inflation and add diversification to most portfolios.
The most common exposure to real estate investing comes from purchasing your first home. Savings for a down payment are part of your initial investment in your primary residence. However, because real estate investments involve physical assets, they involve maintenance and local property taxes. Read more about the hidden costs of homeownership before investing.
Best For: First Time Homeowners, Income Investors, Higher Risk Investors
Types: Real Estate Investment Trusts (REITs), Rental Properties
6. Commodities
Commodities are raw materials or agricultural products that can be bought and sold in commodities markets. They are physical assets (like real estate) and include gold, steel, oil, wheat, and soybeans.
Because they are physical assets, commodities offer another avenue to hedge against inflation while diversifying your portfolio. Their prices can be impacted by weather, geopolitical turbulence, economic volatility, and unseen supply and demand issues.
Best For: Capital Preservation, Inflation Hedge
Types: Gold, Silver, Copper, Lumber
7. Other Asset Classes
Many investors choose to invest in other asset categories, including collectibles and tangible assets like classic cars, rare art, fine wines, and antiques. These types of investments are unique in that they offer investors the potential for capital appreciation and entertainment value.
Many finance professionals advocate adding alternative investments to your portfolio only after you have reached a particular stage of net worth. This usually involves paying off all your debts, accruing your emergency and slush funds, and having an above average retirement savings for your age.
Alternative assets certainly provide diversification, but they can vary widely in valuation and liquidity.
Best For: Liquidity Agnostic Investors, Collectors, High Risk Investors
Types: Fine Art, Vintage Wines, Classic Cars
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Smart Summary
The three main asset classes include stock, bonds, and cash. Adding these assets and more to your portfolio will increase your net worth and help you reach your long-term money goals. Fixed-income investments, cryptocurrencies, commodities, and alternative investments also offer a smattering of investment choices that you can add to your portfolio platter. Investing is a proven way to reach your goals, and prioritizing saving and investing will help curb excessive spending. You can even automate your finances to achieve your goals faster.
Frequently Asked Questions
The fastest asset class to accumulate is cash in a high-interest savings account. These accounts offer the advantage of being tremendously accessible because they offer apps that you can use to transfer money on the goal and check in on your account regularly.
The best asset class to invest in depends on your current portfolio. For example, if you are about to buy your first home, you might not want to purchase more real estate investments because you would be overexposed to the real estate market. However, it might make sense to invest in Bitcoin.
This all depends on your portfolio allocation. Exposure to all asset classes will broaden your diversification and expand your opportunity to earn returns. Alternatively, you could concentrate your holding on one asset class, like stocks, to try and generate outsized investment returns.
(1) U.S. Securities and Exchange Commission. Asset Classes. Last Accessed January 14, 2025.
(2) Official Data.org. Stock market returns between 1957 and 2023. Last Accessed January 14, 2025.
(3) Internal Revenue Service. Digital Assets. Last Accessed January 14, 2025.
(4) U.S. Securities and Exchange Commission. Statement on the Approval of Spot Bitcoin Exchange-Traded Products. Last Accessed January 14, 2025.
