Definition of asset class


What is an asset class?

An asset class is a grouping of investments that have similar characteristics and are subject to the same laws and regulations. Asset classes are thus made up of instruments that often behave in a similar way on the market.

Key points to remember

  • An asset class is a grouping of investments that have similar characteristics and are subject to the same laws and regulations.
  • Common examples of asset classes are stocks (for example, stocks), fixed income securities (for example, bonds), cash and cash equivalents, real estate, commodities and currencies. .
  • There is usually very little correlation, and in some cases a negative correlation, between different asset classes.
  • Financial advisers focus on asset classes as a way to help investors diversify their portfolios.

Understanding asset classes

Simply put, an asset class is a collection of comparable financial securities. For example, IBM, MSFT, AAPL are a group of actions. Asset classes and asset class categories are often mixed. There is usually very little correlation, and in some cases a negative correlation, between different asset classes. This characteristic is an integral part of the field of investment.

Historically, the three main active the courses were actions (equities), fixed income (bonds) and cash equivalents or money market instruments. Today, most investment professionals understand immovable, basic products, futures contracts, other financial derivatives and even cryptocurrencies in the composition of asset classes. Investment assets include both tangible and intangible instruments that investors buy and sell with the aim of generating additional income, in the short or long term. long term basis.

View of Financial Advisors investment vehicles as categories of asset classes used for diversification purposes. Each asset class should reflect different investment characteristics in terms of risk and return and operate differently in a given market environment. Investors interested in maximizing returns often do so by reducing portfolio risk through diversification of asset classes.

Financial advisers will help investors diversify their portfolios by combining assets from different asset classes that have different cash flows and varying degrees of risk. Investing in several different asset classes guarantees a certain diversity in investment choices. Diversification reduces risk and increases your likelihood of earning a return.

Asset class and investment strategy

Investors looking alpha employ investment strategies focused on obtaining alpha returns. Investment strategies can be related to growth, value, income, or a variety of other factors that help identify and rank investment options according to a specific set of criteria. Some analysts associate the criteria with performance and / or evaluation measures such as earnings per share growth (EPS) or price / benefit (P / E ratio. Other analysts are less concerned with performance and more with type or class of asset. An investment in a particular asset class is an investment in an asset that exhibits a certain set of characteristics. Therefore, investments in the same asset class tend to generate similar cash flows.

Types of asset classes

Equities (stocks), bonds (fixed income securities), cash or marketable securities and commodities are the most liquid asset classes and, therefore, the most popular asset classes.

There are also alternative asset classes, such as real estate and valuable stocks, such as works of art, stamps, and other tradable collectibles. Some analysts also refer to an investment in hedge funds, venture capital, crowdsourcing or cryptocurrencies as examples of alternative investments. However, the illiquidity of an asset does not speak of its potential return; It only means that it may take longer to find a buyer to convert the asset to cash.

What are the most popular asset classes?

Historically, the three main asset classes have been stocks (stocks), fixed income securities (bonds) and cash equivalents or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the combination of asset classes.

Which asset class has the best historical returns?

The stock market has proven to produce the highest returns over long periods of time. Since the late 1920s, the TCCA (compound annual growth rate) for the S&P 500 is approximately 7.63%, assuming all dividends have been reinvested and accounting for inflation. In other words, one hundred dollars invested in the S&P 500 on January 1, 1920, would have been worth about $ 167,500 (in 1928 dollars) by December 31, 2020. Without adjustment for inflation, the total would have grown to over $ 2. $ 2 million in $ 2020. By comparison, the same $ 100 invested in 10-year treasury bills would have been worth just over $ 8,000 in today’s dollars.

Why are asset classes useful?

Financial advisors focus on asset classes as a way to help investors diversify their portfolios to maximize returns. Investing in several different asset classes guarantees a certain diversity in the investment choices. Each asset class should reflect different investment characteristics in terms of risk and return and operate differently in a given market environment.

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