Your Full Guide to Investment Asset Classes

When you’re beginning to invest, it can feel like a lot to figure out. 

You have to think about your time horizon and risk tolerance, and once you’ve nailed that down, you have to consider asset classes.

The assets in your portfolio determine the returns you can earn on your money. That’s why it’s important to understand the different types of assets and the benefits and downsides of each. 

Erika Taught Me

  • Asset classes are groups of investments that tend to perform similarly in the market and have similar regulations.
  • Higher-risk assets come with potentially higher returns, while low-risk assets provide stability.
  • Examples of basic asset classes are cash, stocks, and fixed-income securities.
  • Rebalancing your asset allocation can help limit your risk.

. . .

Asset Classes Definition

You probably already know that putting all your eggs in one basket is risky. When investing, you want to use multiple “baskets” of investments so that if one drops, you haven’t lost everything.

Asset classes are those baskets. 

The most basic list of asset classes is stocks, bonds, and cash. But there are also asset classes for commodities like gold or agricultural products, as well as real estate and other alternative asset classes. 

Within asset classes, you’ll also find sub-asset classes, which just means they’re investments that have certain things in common but with key differences. 

With each of the investment asset classes, you’ll see similarities like:

  • How risky they are
  • How they’re taxed
  • How liquid they are 
  • How they perform based on market conditions

Assets within each class typically have the same legal restrictions and regulations. 

Investing in multiple asset classes is an important part of managing your portfolio.

READ MORE: Why Asset Allocation Is Essential for Investing

Examples of Asset Classes

As you review these examples of asset classes, consider how you can best divide up your own funds. 

Investing in multiple asset classes helps spread out risk, so even if one asset class underperforms, others may rise up and compensate. 

Stocks

Stocks (also called equities) are shares of public companies. 

You know those ticker symbols you see for the NASDAQ or the New York Stock Exchange (NYSE)? Those represent the company and its current price for investors. 

Buying stock makes you a shareholder of a company — which means you also share in the rewards when that company makes money. 

Stocks also have sub-asset classes of small-cap, mid-cap, and large-cap stocks. Market capitalization, or market cap, is the value of the total outstanding shares of a company’s stock. Different market caps tend to reflect the stock’s potential growth.

The stock market is one of the riskiest asset classes, but with greater risk comes greater (potential) reward. Your returns can help beat inflation and your money is fairly liquid, or accessible, once you sell shares. 

Pros of stocks

  • High potential returns
  • Dividend payments on some stocks
  • Hedge against inflation
  • Liquidity

Cons of stocks

  • High risk due to market volatility
  • Tax obligations

Fixed-income securities

Fixed-income securities mean they have a fixed rate of return. They’re good for risk-averse investors and those who need to balance out more unpredictable investments. 

Examples of fixed-income securities are U.S. government bonds, U.S. Treasury bills, Treasury notes, and corporate bonds. 

Buying bonds means lending money to the bond issuer in exchange for a fixed interest rate throughout the life of the bond. You receive scheduled payments and, if you you hold that bond to maturity, you get the full principal back. 

Fixed-income securities can act as a buffer against the higher risk of investing in stocks. The steady payments and low volatility make them attractive for older investors — but you shouldn’t discount them as a young person, either.

Bonds aren’t completely risk-free. The issuer may default on payments, or market interest rates may decline, affecting your returns. In addition, you could be harmed by inflation, since you’re getting a fixed interest rate while inflation goes up. 

Pros of fixed-income securities

  • Stable payments
  • Return of initial investment
  • Low risk

Cons of fixed-income securities

  • Lower rate of return
  • Risk of dropping interest rates
  • Bond issuer may default

Commodities

Commodities are goods such as agricultural products or raw materials.

Examples of commodities include crops like corn or soybeans, as well as livestock such as cattle. Other commodities must be mined (think: gold, copper, oil). 

If you’re concerned about inflation, you might Include commodities in your asset allocation. Commodities prices will typically rise simultaneously with inflation.

However, commodities are fairly volatile and can be tricky to manage, especially if you’re new to investing. You can invest in commodities directly or in a commodity mutual fund or exchange-traded product (ETP).

But be cautious about directly investing in commodities — since they’re not securities, they’re not covered by the Securities Investor Protection Corporation (SIPC). 

Pros of commodities

  • Protection from inflation
  • Adds diversification
  • Potentially high returns

Cons of commodities

  • High volatility
  • Dependent on external factors like weather and global economy
  • No regular income

Real estate

Another high-risk, low-liquidity asset class is real estate. 

When you buy property as an investment, you can make returns through rent charged over the years as well as through an eventual sale of that property. 

Real estate tends to appreciate (increase in value) over time and isn’t always easy to sell quickly, so it’s best to buy property to hold for many years. As of 2023, home prices in the U.S. had gone up for 11 years in a row. 

Real estate can be a very profitable investment, and if you’re nervous about being a landlord, you can dip your toe into real estate by buying shares of real estate investment trusts (REITs). 

Pros of real estate

  • Potential for high returns
  • Diversification

Cons of real estate

  • Non-liquid
  • Complex to manage

Cash 

You can also keep some of your investment portfolio in straight-up cash. 

Places to stash your cash include high-yield savings accounts, money market accounts, or certificates of deposit (CDs). Cash deposits at FDIC-insured banks provide FDIC coverage up to $250,000 — meaning if the bank fails, you won’t lose your money up to that amount. 

Cash is typically liquid, meaning you can access it anytime. An exception is CDs, as you can’t withdraw before the CD matures without a penalty. 

Despite the lower potential for returns, it’s wise to have some of your asset allocation in cash, even if just for your emergency fund

Pros of cash

  • Liquidity
  • Security of FDIC coverage
  • Balance out higher-risk investments

Cons of cash

  • Lower returns
  • Penalties for early withdrawal on CDs
  • No inflation protection

FAQs

Which asset class has the highest return?

Historically, among multiple asset classes, stocks offer the highest rate of return. 

If you invested $100 in the S&P 500 in 1928 and continued reinvesting all dividends, by 2023 that initial $100 would have ballooned to $898,734.26. 

That’s a rate of return of 9.95% per year. 

Balance high-risk, high-return investments with low-risk asset classes.

How is asset allocation different from diversification?

The terms asset allocation and diversification are often used interchangeably, but they refer to different things. 

Asset allocation is the percentage of your investments you put into each of the different asset classes. Diversification is spreading out your investments within those asset classes. 

Both asset allocation and diversification lower your investment risk. 

TL;DR

There are several primary asset classes — and to invest effectively for the long term, you should stash money in multiple asset classes. That way, even when some asset classes slow in returns, others may still grow. 

For more beginner tips on investing, check out these episodes of the Erika Taught Me podcast:

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.