INTRODUCTION TO ASSET CLASSES

One of the most essential financial goals for anybody is “building wealth.” There could be various reasons why people want to build wealth. Depending on their preferences and what they enjoy, they might opt for nice houses, luxury cars/yachts, traveling, charity, expensive clothes, toys to play with, etc.

There hasn’t been a time like now when there’s a wide range of options available to choose from when it comes to investing. This includes stocks, real estate, metals (gold, silver, etc.), bonds, cryptocurrencies etc. Giving your money to someone to invest for you, can come with risk; please do not take it lightly. You better do your due diligence when it comes to investing.

So, how can one choose which option to invest their hard-earned money? It all boils down to examining and comparing asset classes against each other to see which might be a good fit for you.

There could be a lot of factors that decide which approach suits your investing portfolio. Such factors include your risk tolerance level, the timeline of investing, value, ROI (Return on Investment), how much control you have over the investment, investing goals, etc. With any investment route you choose, there will be advantages and disadvantages. We will examine the approaches you can take, the result, etc.

First, this blog will look at different categories of “asset classes.” If you need to know what assets are, please refer to the previous blog about investing.

1. STOCKS/EQUITY

Equity means owning a fraction/share of a company, generally done through stocks. Any company that is listed publicly trades shares to individuals who can buy them through brokerages like Robinhood, E*trade, WeBull, Fidelity, etc.

Whenever someone buys a stock/share of a company, they become a partial owner. That person would have the right to vote and question the company’s growth prospects, finances, etc. The stock owner is also entitled to the dividends paid by the company. Most companies in the United States pay a quarterly dividend to shareholders. Dividends are a portion of the company’s earnings that are paid back to the shareholders. We will cover dividends in a separate blog post. 

People tend to own stocks for either capital appreciation or dividends. Anyone investing would want to sell their stocks higher than their buying price to make a profit.

2. REAL ESTATE

Real Estate includes properties or REITs which generate income for you. Real Estate includes various types, such as:

1. RESIDENTIAL REAL ESTATE: Properties that are used for non-business purposes, like Apartments, Multi-family houses, condominiums, etc., can be considered residential properties.
2. LAND: Buying and selling of land.
3. COMMERCIAL REAL ESTATE: This includes shopping centers, strip malls, buildings for schools/hospitals/offices, etc.
4. INDUSTRIAL REAL ESTATE: Manufacturing buildings and warehouses for storing or distributing goods come under Industrial Real Estate. This might require many approvals for setting up, depending on where you live.
5. REITs: Real Estate Investment Trusts(REITs) are the companies that own/finance income-generating real estate. REITs are traded on stock exchanges. You can buy them similar to stocks. Keep in mind they have a different tax structure compared to regular stocks.

3. FIXED INCOME

Assets like Bonds come under Fixed Income.

Bonds are debt securities that entities like governments or companies issue to investors for loaning money. The company generally offers fixed, regular payments to lenders in exchange for money lent. Hence the name “Fixed Income”. Bond investment is usually considered less risky than stocks or real estate because the entity/company guarantees to pay you the capital and interest by the period’s end. 

4. COMMODITIES

These are physical or raw goods from Earth, such as gold, silver, etc. With population growth, the supply of resources is decreasing gradually, leading to a rise in the prices of such commodities. For a diversified portfolio, this could act like an insurance policy.

5. CURRENCY/CRYPTOCURRENCY

You could also invest in different currencies around the world. This also includes cryptocurrencies like Bitcoin, Ethereum, Litecoin, Dogecoin, etc. Investors could make directional bets on various currencies worldwide, from developed nations like the U.S., the U.K., Australia, etc., to developing nations such as India, China, etc. Various Bitcoin SPOT ETFs were approved recently, and you can invest through respective brokerages.

You can decide which would be better for your portfolio after we compare each asset class, the rate of return generated over the last few decades, risk/reward, etc.