What Is an Asset Class?
An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace. Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments.1 Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies to the asset class mix. Investment assets include both tangible and intangible instruments which investors buy and sell for the purposes of generating additional income on either a short- or a long-term basis.
- An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations.
- Equities (stocks), fixed Income (bonds), cash and cash equivalents, real estate, commodities, futures, and other financial derivatives are examples of asset classes.
- There is usually very little correlation, and in some cases a negative correlation, between different asset classes.
- Financial advisors focus on asset class as a way to help investors diversify their portfolio.
Understanding Asset Classes
Simply put, an asset class is a grouping of comparable financial securities. For example, IBM, MSFT, AAPL are a grouping of stocks. Asset classes and asset class categories are often mixed together. There is usually very little correlation, and in some cases a negative correlation, between different asset classes. This characteristic is integral to the field of investing.
Financial advisors view investment vehicles as asset class categories that are used for diversification purposes.1 Each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification.
Financial advisors focus on asset class as a way to help investors diversify their portfolio. Different asset classes have different cash flows streams and varying degrees of risk. Investing in several different asset classes ensures a certain amount of diversity in investment selections. Diversification reduces risk and increases your probability of making a return.
Asset Class and Investing Strategy
Investors looking for alpha employ investment strategies focused on achieving alpha returns. Investment strategies can be tied to growth, value, income or a variety of other factors that help to identify and categorize investment options according to a specific set of criteria. Some analysts link criteria to performance and/or valuation metrics such as earnings-per-share growth (EPS) or the price-to-earnings (P/E) ratio. Other analysts are less concerned with performance and more concerned with the asset type or class. An investment in a particular asset class is an investment in an asset that exhibits a certain set of characteristics. As a result, investments in the same asset class tend to have similar cash flows.
Asset Class Types
Equities, or stocks; bonds, or fixed-income securities; cash, or marketable securities; and commodities are the most liquid asset classes and, therefore, the most quoted asset classes. There are also alternative asset classes, such as real estate, and valuable inventory, such as artwork, stamps and other tradable collectibles. Some analysts also refer to an investment in hedge funds, venture capital, crowdsourcing or cryptocurrencies as examples of alternative investments. That said, an asset's illiquidity does not speak to its return potential; It only means it may take more time to find a buyer to convert the asset to cash.
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