The Four Main Asset Classes
The types of investment assets to build your portfolio.
There are thousands of different investments available to pick from that could be categorized in hundreds of different ways. One simple way to think about them is to organize them into four main asset classes: cash, bonds, equities, and alternative investments.
Tip from Pressy Long, CFP®
Don’t put all your eggs in one basket! It’s often unwise to invest in just a single investment category. By spreading your investment eggs across several baskets – or diversifying – your success or failure doesn’t depend on the performance of just one investment or investment category.
Cash and cash equivalents, like savings accounts, money markets, and certificates of deposit (CDs) are meant to be low-risk and accessible. Their returns tend to be lower than equities and bonds because they are less risky. This typically makes cash a poor choice for long-term goals because it may not keep up with inflation.
Represents a loan made by an investor to a borrower, typically a business or government entity. The borrower promises the debt will be paid back with interest at a specific time. Bonds are issued by corporations, governments and municipalities to raise funds for a variety of projects.
Also known as stock and represents ownership in a company. The purchase of a stock makes you a shareholder in the company. Companies sell stock to raise money to fund their business and the company value may go up or down, which affects the stock price. As a result, the stock may be sold at a profit or loss. Companies may also distribute profits by giving shareholders periodic payments called dividends.
Alternative investments, like equities, represent ownership in the investment. Examples include digital assets, cryptocurrencies, real estate investment trusts, and commodities. These speculative investments have the potential for great reward, but come with significantly higher risk than the other categories.