Asset Classes – Diversification, Purpose, and Investment Strategies
An asset class is a group of comparable financial securities, subject to similar characteristics; specifically laws and regulations. Put simply, asset classes form the basis of investing, clearly outlining the negative correlations between the various asset class options.
This includes both short term and long term options. With changes over time, the following asset classes are now generally accepted:
- Stocks – Equity-based investments
- Bonds – Fixed income based investments
- Cash or cash-equivalents, including real estate and cryptocurrencies, among most other investment options.
Based on different financial schools of thought, some advisors may class the emerging, or non-traditional classes as ‘alternative classes’.
The said non-traditional options may include cryptocurrencies, hedge funds, and even art pieces and stamps.
We have already mentioned that asset classes form the basis of investment. More specifically, an understanding of asset classes forms the basis of investment diversification. In other words, investment diversification is more a case of asset class investment diversification.
As expected, each asset class is expected to carry its own risks and opportunities, dependent on market conditions. Therefore, a diversified investment in various classes improves probability of positive returns.
There are various ways in which a financial advisor may present investment options.
Away from a simplified diversified investment in asset classes, the most quoted options generally limit to stocks, bonds, and property. This is because such options are seen as more fluid.
Other investors may follow a calculation-based model. This includes valuation metrics, such as investment/price-to-earning (P/E) ratios.
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And, to learn about other areas of investment, check: