Asset Classes Decoded

An asset class is a group of investments with similar features and functions, including:

  • Comparable amounts of risk and return
  • Reactions to good or bad events in the marketplace
  • How they are governed and taxed

There are three core types of asset classes. These are:

  1. Cash equivalents (a subset of fixed income): you are a short-term lender
  2. Fixed income: you are a lender
  3. Equities: you are an owner

The Great Beyond: The Alternatives

There are also alternative asset classes beyond the so-called core asset types. Alternatives include both physical assets and ways of investing. What defines all alternative assets is their differences. They are not part of the traditional asset classes. They involve a heavy reliance on the skill and savvy of the investor. While there is no definitive list, the assets listed in the following table are generally considered to be alternatives.

You Own Physical Assets

You Invest a Certain Way

  • Collectibles
    • Art, stamps, coins, hockey cards
    • Antiques
    • Cars
    • Race horses
  • Real estate
  • Infrastructure
  • Commodities (such as gold)

Derivatives (such as futures and options contracts) on:

  • Commodities
    • Financial instruments
    • Hedge funds
  • Private equity financing

 

The Risk Pyramid

The risk pyramid (shown below) illustrates the relative “safety” of the various asset classes. There is an obvious relationship between increased risk (of loss of principal) and reward (increased potential return)  as you ascend the pyramid. Conversely, while investments on the lower steps may offer more certainty, there is still the risk of losing purchasing power through inflation. Always consider the trade-off between achieving your wealth accumulation goals and the amount of risk you are willing to take.

Asset Categories: Inside an Asset Class

In biology, plant variations are grouped into species and subspecies. In the world of investing, subgroups within asset classes are called asset categories. Dividing up an asset class into subcategories makes it easier for you to compare and choose between them.

Consider this: when you buy a vehicle, you first choose between a truck, car or van and then between brands, features and upgrades. Similarly, assets are considered an investment vehicle; and similarly, you pick and choose the right asset to suit your needs.

The "Types of Investments" section of this website is intended to help you explore each asset class. Don’t know where to find asset classes? Look for: