Stocks, bonds, commodities, cash, real estate. Each of these elements constitutes an asset class, i.e., an investment category.
In an investment strategy, asset classes are combined to go to build a diversified portfolio.
An asset class thus defines a set of instruments with similar characteristics and similar behavior in the markets. Here are what the main ones are.
What are the main asset classes?
Stocks are a portion of a company’s capital. Those who invest in equities gain through dividends, when they are expected, and from any increase in the price of the stock relative to the purchase when it is sold.
They usually provide higher returns than bonds, but they are also riskier.
With bonds, on the other hand, the person who buys them actually finances the entity that issued that security until maturity.
They can be government bonds, but also securities issued by companies or banks. By subscribing to the security, one buys the right to receive interest periodically and, at maturity, repayment of the principal invested.
In the monetary asset class, that of liquidity, on the other hand, are current accounts and deposit accounts.
Among commodities, there are assets such as natural resources, metals, agricultural or energy products. One invests in this category by underwriting products that have commodities as their underlying. Real estate can also be an asset class in its own right.
Read also: A guide to financial instruments: what they are and which are the most common today
How to combine asset classes in the portfolio
Which asset class to choose and how to mix them is the basis of the investment strategy.
The asset manager is the professional who is precisely responsible for the administration of an investor’s assets and who defines the asset allocation of a portfolio. Thus optimizing its expected return and risk.
The asset allocation must be related to the individual investor’s risk profile. For example, the individual with a higher risk profile will tend to compose his or her portfolio by giving greater weight to equities.
Conversely, a person with a lower risk profile will include more bonds.
For everyone there may be a different recipe. But one of the pillars of a good investment portfolio always remains diversification.
Read also: Diversification in finance: benefits and strategies