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4 Major Asset Classes that Every New Investor Should Know About.

You don't need to know much or have a lot of money to start investing. You just need a basic understanding of the investing building blocks: stocks and mutual funds (exchange-traded funds and index funds). These are further divided into asset classes, which are the backbone of any investment portfolio. Here are the major asset classes that every new investor should know about to build a supercharged investment portfolio.

​4 Asset classes to build your investment portfolio around

There are basically 4 main asset classes: equities or stocks, bonds, cash and real estate. A brief discussion of each follows.

  1. Equities/stocks. When investors talk about equities, they are referring to stocks--domestic and foreign. Stocks essentially allow you to own a piece of a company. Learn more about stocks and equities.
  2. Bonds. Bonds are considered fixed income. Think of them as lending money to a company or government entity. You expect the bond holder to pay you back, with interest, of course. Learn more about bonds.
  3. Cash. It's just what the name says it is! This can also be in the form of money market funds, security deposits, among others. But remember that cash is trash, unless you invest it!
  4. Real estate. Obviously, this is just physical property. You can invest in real estate without owning physical properties, using real estate investment trusts (REITs).

A discussion about asset clases is not complete without talking about diversification, even briefly.

What is diversification?

To diversify is to not put all your eggs in one basket. In investing, diversification is the simple process of putting your money in different asset classes or sectors to minimize financial loss. Based on your age, risk tolerance and investment objective, you can use a combination of the different asset classes above to create a diversified investment portfolio or one that meets your individual needs.

​The bottom line

Anyone can become an investor. Once you have a basic understanding of the major asset classes, use them in whatever combination you see fit to give yourself a brighter financial future. Who knows? You can even do it yourself and fire your broker or robo advisor!

Here are a few other articles you may find useful: How investors make money in the stock market | Stocks vs. index funds vs. ETFs: differences and similarities | I heeded Warren Buffett's advice. I can't stop winning | 2 simple reasons why you don't need bonds in your portfolio  | A simple index fund and ETF quiz | 4 smart ways to both invest and pay down student debt.

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Saturday, 04 April 2020

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