Defining the Three Basic Asset Classes

Each asset class will have sub-categories, but for those who are just starting out with investing, knowing the top-level asset classes and what they stand for is usually a great start because each properly diversified investment portfolio will consist of all three.

1. Cash and Cash Equivalent Class. In this asset class, investors will not have invested any of their funds. They are typically sitting in a cash account that is so safe there is normally little or no interested even paid on these assets. For the little or no interest earned on this asset class, investors are able to enjoy extreme liquidity, meaning they can access those funds for any reason whatsoever with little or no advanced notice. This allows the investor with a tremendous amount of flexibility when it comes to purchasing addition assets or making other consumer purchases.

2. Fixed Income. In this asset class, investors are looking for a steady stream of fixed income. That means they expect $XXX.xx every month or every quarter, regardless of the current market value of the investment. This asset class consists primarily of term deposits (which will not normally fluctuate in value) and bonds (which will fluctuate in value). This asset class is generally less volatile that the equity, or growth class, but it should be noted that fluctuations in value are normal and to be expected. In terms of accessing cash by reselling these assets on the open market, there is a delay in the settlement period, making these assets less liquid than the cash class.

3. Growth Class. In this asset class, the return comes in the form of capital appreciation. Investors who invest in growth oriented assets are normally not concerned with income levels or accessibility; they believe that over the long term, the funds they invest will double or triple or more in value and this appreciation is what constitutes the returns. As far as liquidity is concerned, many of these assets are highly liquid but require several days to “settle.” The problem as well is that given the volatility of these assets, cashing them out at market value might not be wise if they have become devalued. Examples of growth assets would be real estate, stocks, and other securities that are expected to increase in value over a longer time period.

These three asset classes are the fundamental classes to any portfolio. Of course, there are more specialized sub-categories to each, such as high yield bonds within the fixed income class, and blue-chip stock funds in the growth class. These sub-categories come with their own risks and potential rewards and are usually employed as a compliment to the existing asset classes discussed above.

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