Asset Classes

Next we consider what assets to invest in. There are various asset classes to choose from. These are things like stocks or bonds. This page will help you learn the basics about asset classes. Contents:

Select Video Tutorials about Investing in Asset Classes

Playlist for learning About Asset Classes:

All are excellent videos. The transcripts can help you make best use of your time.

The first of these videos is the one I most highly recommend to begin to understand asset classes. It uses the periodic table for a wonderful analogy of investment categories—recall that the periodic table is all the elements that make up our world. Instead of elements they use the major investment classes and rank them each year by their returns. I highly recommend watching it!

Commonly asked questions


Asset Classes:

Quick answers to common questions


What are the asset classes?

Main article: Best Mutual Funds in 2014 by Asset Classes (video)

The simple definition of an asset class is a group of securities that are similar in fundamental ways. The three main asset classes are equities (stocks), fixed income (bonds), and cash equivalents. All other types of investments are designated alternative investments, and often involve owning various forms of physical property.

  • Equities (stocks), owning a piece of a company
  • Fixed Income (debt), lending money to a company or government for interest (bonds and certificates of deposit, for example)
  • Cash equivalents, the money in your savings account or money market funds
  • Alternative Investments, which included real-estate, commodities, hedge funds, private equity, and art.

Investments in different asset classes react differently to news—and that’s a good thing. A given piece of news might be positive for stocks, negative for bonds, indifferent for cash equivalents, and mixed for alternatives.

Equities are shares in the ownership of publicly-owned businesses. Their value goes up and down on investors perceptions of the firms performance. Historically, this asset class provides the highest return but is the most volatile.

Fixed income is more stable than stocks, but does fluctuate in response to market interest rates.

Cash equivalents are considered the safest, although their risk is that they may not keep up with inflation.

Real Estate includes homes and investment properties and funds that hold groups of them. While these tend to be more stable than stocks, their value can still rise or fall sharply.

Commodities are investments in other physical things or natural resources like livestock, agriculture, metals, or energy.

It is commonly accepted that owning investments from different asset classes, which is called diversification, can reduce a portfolio’s overall volatility.

From here, we can categorize each asset class in even greater detail …  [READ MORE]

Which asset classes are hot?

Main article: Best Mutual Funds in 2014 by Asset Classes (video)

This is absolutely the wrong question. Please watch this video to understand why the only way this question could be worthwhile is if you wanted to explore whether any asset classes were currently underperforming where you would expect them to be ranked relatively and you were willing to make a long-term investment. Otherwise, more often than not, today’s winners are tomorrow’s losers.

How many asset classes do I need?

Main article: Best Mutual Funds in 2014 by Asset Classes (video)

You could be fine with a single balanced fund that represented all available investments in the world. An important nuance is the get the stock/bond allocation correct. If you can establish the stock/bond ratio that is appropriate for you, you can even roughly approximate market returns by investing in the S&P 500 for your stocks and some good CDs for your bonds.

What about investing in gold? Would one of these be a good asset class? Gabelli gold fund? Tocqueville gold fund? First eagle gold fund? Oppenheimer gold fund? Fidelity gold fund? Vanguard gold fund?

Main article: Buffet: ‘Gold is a speculative investment!’ (video)

You are wandering out of the realm of investing in productive assets, and into the realm of speculative investments. Investing in gold is parking your money in a non-productive investment and hoping that some future buyer will want to pay more for it than you did. Meanwhile it does nothing for you but sparkle.

Are there times where you should sell stocks and go full-bore into commodities?

Main article: Buffet: ‘Gold is a speculative investment!’ (video)

Commodities are a speculative investment about future prices. Warren Buffett vastly prefers productive assets (like equities, or farms) to non-productive assets (like gold, or art).

Is gold a good investment during volatile markets?

Main article: Bogle: ‘Gold is not an investment at all!’ (video)

Bogle says no. You should invest for the long term. And to try to get in at the bottom and out at the top is simply impossible for anybody. But over the long term, it’s a very good bet that stocks will do significantly better than bonds, gold, or other commodities.



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