What is an asset class & what are the different types?
- An asset class is a group of investments sharing similar characteristics that follow the same financial market and regulations.
- There are mainly five types of asset classes: fixed income, cash, equities, real assets, and alternative investments.
- Diversifying your investments across different asset classes can help you minimize the overall risk.
What is an asset class?
An asset class is a group of investments sharing similar characteristics and behaviors. Additionally, an asset class is usually traded in the same financial markets and adheres to the same rules and regulations. For example, there’s Ethereum and Bitcoin among crypto, and in commodities, there’s gold and oil.
Typically, investors try to diversify their investments into each asset class since they behave differently under specific market conditions. If you’re new to investing, this can sound like a daunting task to take on. However, you can enlist the help of automated trading apps. For example, In the BOTS App, we have bots dedicated to staking, shorting, fixed-income rewards, and HODLing, so depending on your goals, you can use the app to diversify your portfolio with specific asset classes.
While investing can be daunting, you can reach your financial goals with the right tools and support. BOTS can help you through your journey, and as we continue to develop, we have to meet the needs of all investors. If you don’t already have the BOTS app, download it here.
The 5 different types of asset classes
While there’s some debate about how many different classes of assets exist, most financial advisors and market analysts divide asset classes into five categories. This includes:
Fixed-income investments are loans divided into units and then sold to investors. Investors give the principal beforehand and then receive interest payments until maturity.
Once it’s reached maturity, investors are repaid the initial principal. While the most common type of fixed-income investment is bonds, they’re not the only type. For example, mutual funds are also fixed income. Broadly speaking, fixed-income investments are considered low risk.
Cash or cash equivalents
You know what cash is (who doesn’t?)—the legal tender commonly used to buy goods and pay off debts. But what are cash equivalents? Cash equivalents are investments that can be easily converted into cash. For example, certificates of deposit (CD) and Treasury bills are cash equivalents.
With cash or cash equivalent investments, there is little risk as money in the form of cash is quickly accessible. However, before purchasing, investors should look at the company's climate and the economy. Even with low-risk investments, you should also do your due diligence and research your potential investment option.
Equities (or stocks)
Commonly known as stocks, equities are the ownership shares of a company. Once you own shares of a company, you can participate in that company's profile. For example, investors can own stocks of Nike or Google.
The value of equities rises or falls depending on the company's performance, investor demands, etc. Equities are considered high-risk investments because their value is more likely to fluctuate in the short term.
Just like it sounds, real assets are based on tangible items such as real estate or commodities like gold, wheat, or oil. Real assets are considered an asset class that offers protection against inflation. Though they offer some protection, they are still susceptible to a change in economic conditions, etc.
Alternative investments are an umbrella asset class term that includes anything that doesn't fit the above categories. So, for example, cryptocurrency or peer-to-peer loans are considered alternative investments. Alternative investments are considered higher-risk investments.
Now that you know what class assets are and their different categories, you can develop a diversification strategy to avoid putting all your eggs ( aka. investments) into one basket (aka. asset class). By diversifying your investments, you spread your exposure across separate companies in various industries.
Recommended: What is diversification?
This will give you a good balance between diversification and having enough time and resources to manage them. The general rule of thumb is that it takes around 20 to 30 diverse investments in your portfolio.
That said, and we’re sorry to be the bearer of bad news, there is a thing called over-diversification. This is when you own shares in overlapping mutual funds or ETFs, which reduces portfolio returns without reducing risk. See, it’s crucial to find that healthy balance.
This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing.
Any views expressed in this blog and by BOTS do not constitute a recommendation that any particular cryptocurrency (or cryptocurrency token/asset/index), portfolio of cryptocurrencies, transaction, or investment strategy is suitable for any specific person.