ASSET CLASS 101

An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are thus made up of instruments that often behave similarly to one another in the marketplace.

Asset Class Types

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

There are also alternative asset classes, such as real estate, and valuable inventory, such as artwork, 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. That said, an asset's illiquidity does not speak to its return potential; It only means it may take more time 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 equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix.?

Which Asset Class Has the Best Historical Returns?

The stock market has proven to produce the highest returns over extended periods of time. Since the late 1920s, the CAGR (compounded annual growth rate) for the S&P 500 is about 7.63%, assuming that all dividends were reinvested and adjusted for inflation.1 In other words, one hundred dollars invested in the S&P 500 on Jan. 1, 1920, would have been worth about $167,500 (in 1928 dollars) by Dec. 31, 2020. Without adjusting for inflation the total would have grown to more than $2.2 million in 2020 dollars. By comparison, the same $100 invested in 10-year Treasuries would have been worth only a little more than $8,000 in today's dollars.

Why Are Asset Classes Useful?

Financial advisors focus on asset class as a way to help investors diversify their portfolios to maximize returns. Investing in several different asset classes ensures a certain amount of diversity in investment selections. Each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment.