Asset Classes: More than stocks and real estate
We’ve often been told that we should diversify our investments between different asset classes. But this advice never actually gets into the options available to do so. And even when there is talk of diversification, there is mostly general advice to diversify between different industries among stocks at the most. Let’s talk about some of the asset classes that you can park your money in, and not be limited to the limited number of options we are exposed most of the time to.
Stocks/equities: Since this is the most well-known asset class, let’s get it out of the way first. Buying stocks is a way to own a part of the companies you want to be involved in. It could be the foremost defence company in your country or the best tech company in the world, there is an endless number of options. You can gain from stocks in two ways. One, capital appreciation, that is, your money/stake grows as the company grows and two, dividends, which are the percentage of profits a company pays to its shareholders, since they are the owners of the company.
Cash and Cash equivalents: While cash per se is not an appreciating asset most of the time due to inflation (read more here), it is still something that is liquid and in your hand. Most other assets need to be converted back to cash if any need arrives. Cash equivalents are asset classes which are very liquid. There is very low risk with these, but the other side of the coin is that the return is also low. Treasury bills, savings accounts, and money market funds all come into this.
Fixed Income: These investments pay a certain percentage (hence the name “fixed”) at a pre-decided date. Basically, you lend money to entities and you get a return on your money in return. These bonds can be both corporate and government. The interest rate for government bonds would generally be lesser than corporate bonds since the risk of governments going bust and not paying you back is very low, while in the long scheme of things a good percentage of companies would fail.
Commodities: These are primarily raw materials that can be transformed into other goods. Commodities include metals (copper, gold, etc.), agricultural goods (wheat, orange juice, etc.) and energy resources (oil, natural gas, etc.). By the way, if you would like to hear a once-in-a-lifetime story about oil prices going negative, check that out here. Back to commodities. These are required for any economy to grow and hence are viewed as a good hedge against inflation. The prices of commodities are set based on supply and demand. You can invest directly by buying the physical commodities or using derivatives (we’ll talk about these in later articles) or you can invest indirectly by buying shares in companies that produce the commodities.
I think that’s a good amount of information to consider for one day, we’ll talk about more asset classes tomorrow (read that here). Till then, you can read all my articles here. And do let me know if you want a specific topic covered! Subscribe for free to receive new posts and support my work.