Asset classes

From Wikipedia, the free encyclopedia

An asset class is a group of instruments which have similar financial characteristics and behave similarly in the
marketplace. We can often break these instruments into those having to do with real assets and those having to
do with financial assets. Often, assets within the same asset class are subject to the same laws and regulations;
however, this is not always true. For instance, futures on an asset are often considered part of the same asset
class as the underlying instrument but are subject to different regulations than the underlying instrument.

Many investment funds are composed of the two main asset classes which are securities: equities (stocks) and
fixed-income (bonds). However, some also hold cash and foreign currencies. Funds may also hold money
market instruments and they may even refer to these as cash equivalents; however, that ignores the possibility
of default. Money market instruments, being short-term fixed income investments, should therefore be grouped
with fixed income.

In addition to stocks and bonds, we can add cash, foreign currencies, real estate, and commodities to the list of
commonly held asset classes. In general, an asset class is expected to exhibit different risk and return
investment characteristics, and to perform differently in certain market environments.

Asset classes and asset class categories are often mixed together. In other words, describing large-cap stocks or
short-term bonds asset classes is incorrect. These investment vehicles are asset class categories, and are used
for diversification purposes.

Stocks - Also called equities

Represent shares of ownership in publicly held companies

Historically have outperformed other investments over long periods (keep in mind that past performance
does not guarantee future results)
Most volatile in the short term
Returns and principal will fluctuate so that accumulations, when redeemed, may be worth more or less
than original cost

Fixed income - Fixed income, or bond investments, generally pay a set rate of interest over a given period,
then return the investors principal.

Set rate of interest

More stability than stocks
Value fluctuates due to current interest and inflation rates
includes "guaranteed" or "risk-free" assets
Also includes money market instruments (short-term fixed income investments)

Cash

Foreign Currencies - Also called FX, or foreign exchange

No bearish periods, as when one currency's value falls, others' will in turn rise
The only truly 24-hour tradeable asset class
Highly speculative (97%) market

Real estate - Your home or investment property, plus shares of funds that invest in commercial real estate.

Helps protect future purchasing power as property values and rental income run parallel to inflation
Values tend to rise and fall more slowly than stock and bond prices. It is important to keep in mind that
the real estate sector is subject to various risks, including fluctuation in underlying property values,
expenses and income, and potential environmental liabilities.

Commodities - Physical goods such as gold, copper, crude oil, natural gas, wheat, corn, and even electricity.
 Helps protect future purchasing power as values have fixed utility and thus run parallel to inflation
Values tend to exhibit low correlations with stock and bond prices.
Price dynamics are also unique: commodities become more volatile as prices rise. Thus a commodity
with a 20% volatility might have a 50% volatility if prices doubled.

Most financial experts agree that some of the most effective investment strategies involve diversifying
investments across broad asset classes like stocks and bonds, rather than focusing on specific securities that
may or may not turn out to be "winners." Diversification is a technique to help reduce risk. However, there is
no guarantee that diversification will protect against a loss of income.

The goal of asset allocation is to create a balanced mix of assets that have the potential to improve returns,
while meeting your:

Tolerance for risk (market volatility)

Goals and investment objectives
Preferences for certain types of investments within asset classes

Being diversified across asset classes may help reduce volatility. If you include several asset classes in your
long-term portfolio, the upswing of one asset class may help offset the downward movement of another as
conditions change. But keep in mind that there are inherent risks associated with investing in securities, and
diversification doesnt protect against loss.
[1]

[2]

References
1. TIAA-CREF. "TIAA-CREF - Asset Classes" (https://www.tiaa-cref.org/public/advice-guidance/educatio
n/saving-for-retirement/basics/asset_classes?p=1331944007105). tiaa-cref.org. Retrieved 2014-02-28.
2. "Asset Class Definition | Investopedia" (http://www.investopedia.com/terms/a/assetclasses.asp).
investopedia.com. Retrieved 2014-02-28.

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This page was last edited on 2 February 2017, at 00:41.

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