What Are The Most Common Asset Classes For Investors?

Every type of asset gains or loses value differently, so it helps to know what those types are and how they work.

asset classes chart illustration

In 1 minute

Asset classes are investments that share the same risk factors, influences, and regulations. The most common asset classes are stocks, bonds, and cash.

  • Stocks: Stocks are shares of a company, and they gain or lose value based on the company’s performance and potential.
  • Bonds: Bonds are like loans—usually loans to a company or government—which accrue interest over time. 
  • Cash: Think bank accounts. Cash investments are usually short-term loans with low risk and low returns. They’re also federally insured.

Betterment helps you automatically select the mix of assets that can help you meet your goals, and bundles them into funds. Tell us about your financial goals, and we’ll show you a roadmap for  how to reach them.

Got more time? Keep learning about asset classes below.

In 5 minutes

In this guide, we’ll:

  • Explain what an asset class is
  • Explore the most common asset classes
  • Look at mutual funds and ETFs

What is an asset class?

An asset class is a name for a group of assets that share common qualities and behave similarly in the market. They’re governed by the same rules and regulations, and gain or lose value based on the same factors and circumstances. Different asset classes have relatively little in common, and tend to have fluctuations in value that are imperfectly correlated.

There are eight main asset classes: 

  1. Equities (stocks)
  2. Fixed income (bonds)
  3. Cash
  4. Real Estate
  5. Commodities
  6. Cryptocurrencies
  7. Alternative investments
  8. Financial Derivatives

Within these groups, there are several assets people commonly invest in.

The most common types of assets for investors.

The three financial assets you may hear about the most are stocks, bonds, and cash. A strong investment portfolio likely often includes a balance of these assets, or combines them with others. 

Let’s take a closer look at each of these.

Stocks

A stock is a type of equity. It’s basically a tiny piece of a company. When you invest in stocks, you become a partial “owner” of the companies that issued those stocks. You don’t own the building, and you can’t go bossing around the employees, but you’re a shareholder. Your stock’s value is directly tied to the company’s profits, assets, and liabilities. And that means you have a stake in the company’s success or failure.

Stocks are volatile assets—their value changes often—but over time they tend to perform better than other assets (such as bonds and cash). Choosing stocks from a wide range of companies in different industries is one of the smartest ways to diversify your portfolio.

Bonds

A bond represents a share of a loan. Its value comes from the interest on the loan. Bonds are typically more stable than stocks. Lower risk, lower reward. Bonds belong to the “fixed income” asset class, and tend to depend on different risk variables than stocks. If a company has a bad quarter, that’s probably not going to affect the value of your bond. Unless they have a really bad quarter, and default on their loan. When stock markets have a bad month, investors tend to flock to safer asset classes and bonds therefore will likely outperform.  

Other than that, the main things to consider with bonds are interest rates and inflation. When interest rates increase or decrease, it directly affects how much interest you accrue. And since bonds generate lower returns than stocks, they leave you more vulnerable to inflation, too.

Cash

With cash investments, you’re basically loaning cash (often to a bank) in exchange for interest. This is usually a short-term investment, but some cash investments like certificates of deposit (CDs) can last for a few years. These investments are pretty low-risk because you can be confident they will generate a return, and they’re actually insured by the FDIC. 

Cash investments offer higher liquidity meaning you can more quickly sell these assets when you need the money. As such, the return you get is typically lower than what you’d achieve with other asset classes. Investors therefore tend to park the money they need to spend in the near-term in cash investments. 

Other common assets

Those are the big three. But investors also invest in real estate, commodities, alternative asset classes, financial derivatives, and cryptocurrencies. Each of these asset classes come with their own set of risk factors and potential advantages.

What about investment funds?

An investment fund is a basket of assets that can include stocks, bonds, and other investments. The most common kinds of funds you can invest in are mutual funds and exchange-traded funds (ETFs). 

Mutual funds and ETFs are similar, but there’s a reason ETFs are gaining popularity: they’re usually cheaper. ETFs tend to be less expensive to manage and therefore typically have lower expense ratios. Additionally, mutual funds charge a fee to cover their marketing expenses. ETFs don’t. Mutual funds are also more likely to be actively managed, so they can have more administrative costs. Most ETFs are funds that simply track the performance of a specific benchmark index (e.g., the S&P 500), so there’s less overhead to manage ETFs. 

ETFs have another advantage: you can buy and sell them on the stock exchange, just like stocks. You can only sell a mutual fund once per day, at the end of the day. That’s not always the best time. Being able to sell at other times opens the door to other investment strategies, like tax-loss harvesting.

Want to learn more about investment strategies? Check out the ones we use at Betterment. [Button] Go

How to choose the right assets

When you start investing, it’s hard to know what assets belong in your investment portfolio. And it’s easy to make costly mistakes. But if you start with a goal, choosing the right assets is actually pretty easy. 

Say you want $100,000 to make a down payment on a house in 10 years. You have a target amount and a deadline. Now all you have to do is decide how much risk you’re willing to take on and choose assets that fit that risk level. For most investors, it’s simply a matter of balancing the ratio of stocks and bonds in your portfolio.

Sound complicated? Let’s make it even easier. Share one of your goals with us and we’ll show you how to reach it.

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