If you ask people what’s the most complicated part of managing their finances, many (if not most) will tell you it’s investing. I’ve spent the past few years researching and learning about investing - from investing in the stock market, to investing in real estate, to investing in digital assets like cryptocurrency, to investing in commodities like gold. And I can boldly conclude that investing can be easy, investing can be simple, and investing is a ‘must do’ action to take on your personal finance journey.
Asset classes are groups of investments that have similar characteristics, behave in a similar way, and are subject to the same laws and regulations. They are the raw ingredients of an investment portfolio. At the most basic level, there are four primary asset classes: Equities, Fixed income, Cash and cash equivalent, and Real estate and tangible assets.
1️⃣ Equities:
These are also referred to as stocks and shares. Equity represents ownership. When you purchase shares in a company, you're purchasing ownership in that company and you become a shareholder. Equity investors have an expectation that the shares purchased will rise in value in the form of capital gains, and/or generate capital dividends. Neither of these is guaranteed and there is always the risk that the share price will fall below the level at which you invested.
2️⃣ Fixed income:
These are also referred to as bonds. They are a form of loan agreement traded between owners i.e. bondholders. Bonds are issued by companies (corporate bonds) and governments (government bonds) as a way of raising money. They provide a regular stream of dividend payments until its maturity date. At maturity, investors are repaid the principal amount they had invested. Bonds are perceived to be lower risk than equities. They however deliver lower returns over the long-term.
3️⃣ Cash and cash equivalent:
This includes money in the form of currencies (local and foreign), physical bills, treasury bills, coins and any money market liquid investments and certificate of deposits that can readily be converted into cash within 3 months or less. They are lower risk and lower return option in comparison with bonds or equities. They can be a useful tool for very risk‑averse investors or as a temporary home for money in between longer‑term decisions.
4️⃣ Real estate and tangible assets:
These are assets you can physically see and touch. Real estate is the most common type of tangible assets that people own, but commodities, like gold, silver, copper, and natural resources also fall into this category. Their tangible nature leads to them being considered more of a “real” asset because they tend to be more stable than other financial instruments. Inflation, shifts in currency values, and other macroeconomic factors affect real assets less than financial assets.
Many investors focus on asset class as a way to diversify their portfolio. The different asset classes have different cash flow streams and varying degrees of risk. If your portfolio includes investments spread across the four asset classes, it's considered balanced - which is ideal because it reduces risk while maximising return.
Which of these asset classes are you familiar with? Which one are you investing in?
About Nike
Oyenike Adetoye (aka Nike) is an impactful speaker, author and personal finance expert. A Chartered Management Accountant by profession. Nike is the founder and CEO of LifTED Finance, a private financial firm that educates, coaches and supports people on their journey through financial fitness and wealth management.