Understanding asset classes and types of assets

Asset classes are investments that share market behavioral and regulatory similarities. They are a way to group certain similar assets to get an understanding of your overall market exposure so you can create a diversification strategy. 

What is an asset?

An asset is any resource with economic value. Simply put, something that you own that’s worth money. Assets aren’t always investments. You purchase a car to get around. You buy a home for a place to live. Even food is an asset, particularly if it’s inventory for a restaurant. However, many assets are designed to grow wealth, and asset allocation is important in investing. Most asset classes deal with these long-term investment opportunities.

Since everyone’s current situation and future goals are different, the information in this article, or any article for that matter, should not be taken as individual investment advice. Instead, use this information as a guide as you discuss your investment goals and needs with an experienced financial professional.

Different types of assets

There are two primary types of asset categories, but many asset classes (see below). Physical items that have value, such as a home, car, gold or jewelry, and art, are considered tangible assets. Cash and investments such as stocks and bonds are also considered tangible. Intangible assets are non-physical things like patents, copyrights, financial records, and even your reputation. Both asset categories play a role in personal finances, but for the most part, the rest of this article will be focused on tangible assets.

What is an asset class?

An asset class is simply a convenient way to group assets that are alike. Their primary importance is to allow investors to quickly understand how much exposure they have to certain investment types and tailor an overall strategy. Here’s the definition of an asset class:

Similar investments that share characteristics, such as market behavior, risk profile, and regulatory requirements.

Diversifying your asset allocation can help you build a more robust and stable portfolio. Being in the same asset class doesn’t always make an investment similar, however. While stock for company A and company B might be in the same asset class, they can still perform very differently.

5 primary types of asset classes

While there are many examples of asset classes, we are going to focus on the most common ones used in investment and retirement planning. For those purposes, here are the five different types of asset classes you should consider:

Stocks (or equities)

Stocks represent ownership in a company. When you buy a share, you’re essentially buying a piece of that company’s future earnings and potential expansion. Equities have historically delivered higher returns than most other asset classes, though they also come with higher short-term volatility. You can purchase stocks directly or through mutual funds and exchange-traded funds (ETFs), which can offer more diversification.

Bonds (or fixed income)

Bonds are essentially loans made by investors to governments or corporations in exchange for regular interest payments and the return of your initial investment at the end of the period (called maturity). They often can help manage volatility  in a portfolio, helping to balance risk and preserve capital, particularly for retirees or conservative investors. U.S. government bonds like Treasury Inflation-Protected Securities (TIPS) are often used to protect and preserve wealth already accumulated. Bonds are still subject to interest rate risk, however. When interest rates rise, the value of existing bonds in a portfolio tends to decline.

Cash and cash equivalents

Savings accounts, money market funds, and similar cash accounts offer the primary benefit of liquidity. While they tend to generate minimal returns, they are short-term assets and are much easier to access when needed. Holding some cash helps investors to manage emergencies and maintain flexibility in uncertain markets.

Real estate

Real estate investments provide both income potential and portfolio diversification. Direct ownership of real estate can generate steady cash flow and reduce overall portfolio volatility, as its performance doesn’t always move in sync with stocks or bonds. Real Estate investments are also highly tied to interest rates. When rates rise, it may be more difficult or costly to finance a purchase. Also, negative economic environments can affect rental payments and other factors related to the market. You can also invest in real estate investment trusts (REITs). These allow you to invest in large-scale real estate portfolios without having to manage property yourself. They are publicly traded and required to pay out at least 90% of taxable income as dividends.

Commodities

Commodities include physical goods like oil, gold, agricultural products, and industrial metals. They tend to be volatile and speculative, but commodities can play an important role in diversifying your portfolio as they often react differently to global market events and economic cycles. You can directly own some commodities (as many do with gold), or you can invest in them with vehicles similar to stocks and mutual funds.

4 alternative asset categories

In addition to the primary asset classes above, more recent developments in finance and currency have given rise to other ways to invest and grow wealth. These four are often considered alternative asset classes:

Cryptocurrencies

Cryptocurrencies are digital assets that use blockchain technology to record and secure transactions without relying on central authorities. They have become a hot topic among inventors. Recent returns on some cryptocurrencies and non-fungible tokens (NFTs) have been exceptionally high, but there is little regulation, and they can be very volatile. For some investors, cryptocurrencies represent an opportunity to gain exposure to emerging technology and decentralized finance, but they should be approached with caution and a clear understanding of their volatility.

Derivatives

Derivatives are speculative financial contracts based on an underlying asset, such as stocks, bonds, commodities, or currencies. For example, futures contracts are an agreement to buy or sell an asset at a predetermined price on a specific future date whether the actual price of that asset matches or not. Another common term, short selling, is essentially betting that a stock will decline in value in the future, which is the opposite of what most investors want. Derivatives are complex instruments with high risk. They shouldn’t be undertaken lightly. When used strategically, however, they can help you hedge investments and enhance returns.

Private equity and hedge funds

While private equity and hedge funds often deal with more traditional asset classes, many investors see them as different enough to be treated as their own distinct asset class. Private equity focuses on investing directly in private companies or buying out public ones to improve operations and increase value before selling. Hedge funds, meanwhile, use advanced techniques—such as leverage, short selling, and derivatives—to seek higher returns or hedge against market downturns. Both often require significant capital to invest in, limiting this option for many modern investors. In addition, strategies such as leverage, short selling and derivatives may pose the risk of unlimited losses, and these strategies may pose risks of illiquidity.

Art and collectibles

Art, antiques, rare coins, vintage cars, and other collectibles represent tangible, nontraditional investments that can appreciate over time. These assets often appeal to investors seeking diversification and aesthetic or personal satisfaction alongside potential financial gain. Their value is driven by rarity, demand, and cultural significance rather than market fundamentals, which can make them less predictable.

Asset class allocation strategies

All investments have the ability to rise or fall in value. A strong multi-asset allocation strategy helps you balance risk and return. By dividing investments among different asset classes, such as stocks, bonds, real estate, and cash, you can help smooth out overall returns and limit the impact if one class performs poorly. Think of the classic “don’t put all of your eggs in one basket” metaphor. While no allocation strategy can eliminate risk entirely, a disciplined, diversified approach is one of the most reliable ways to pursue stability and growth. A qualified financial professional can help you identify areas in your strategy that may be at risk, and offer advice to help you create a more robust portfolio.

Example of an asset allocation strategy

Consider a hypothetical investor, Alex, who is in their mid-30s with a long-term goal of building wealth for retirement. A potential asset allocation might involve a higher weighting in growth-oriented investments to take advantage of their long-time horizon. For instance, Alex could hold 60% in stocks (a mix of large-cap, mid-cap, and international equities), 25% in bonds (a mix of government and corporate bonds for stability and income), 10% in real estate (through a REIT or property investment for diversification and inflation protection), and 5% in cash or cash equivalents (for liquidity and short-term needs).

This would be similar, but slightly more diversified, than a traditional 70/30 investment strategy, and the mix allows stocks to drive long-term growth and bonds and cash to provide stability and risk mitigation, while real estate offers diversification benefits outside traditional markets. Over time, Alex might periodically rebalance the portfolio to maintain these target percentages, adjusting the allocation as retirement approaches or personal circumstances change.

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