Use this guide to decide which asset class is best for you. It’s crucial you choose the asset that best suits your personality, values, and lifestyle.
The 4 Primary Asset Classes
1. Business
If you are considering starting a business, then you can use your own money, raise money from private individuals or borrow money from a traditional lender in order to get started. The purpose of the money you invest, no matter where it comes from, is to generate a return on that investment, which will go back to you, the business, and your investors/lenders.
If somebody else approaches you to invest in his business idea, you may choose to invest in this private business or company, after first doing your due diligence to determine if the opportunity is right for you. You’ll need to do your homework on:
The project/business, the partners, the financing and the management team.
2. Real Estate
There are two main reasons to invest in real estate: for cash flow from rental properties and for capital gains when you buy and sell properties. You’ll haver to decide which model works best for your goals and situation.
3. Paper Assets
Paper assets include stocks, bonds, mutual funds, ETFs (exchange traded funds) and retirement accounts. You can also invest in stock options, stock futures and foreign exchange. Paper assets include REITs (real estate investment trusts), which are funds that only invest in real estate.
4. Commodities
The final asset class is commodities such as gold, silver, copper, grains, corn, coffee, sugar, oil, gas, and cotton among many others. The price of commodities is typically driven by supply and demand. You can buy physical gold and silver at your local precious-metals dealer or you can buy future contracts of any commodity through the futures exchanges.
What exactly is the definition of diversification?
When most folks talk about a diversified portfolio, they are usually referring to their stock portfolio. Diversification to them means investing across the various stock sectors, such as large cap, small cap, blue chip, high tech, or alternative energy.
But to truly be diversified means to diversify beyond paper assets, across all asset classes.
You should be invested in all four asset classes. Each asset class reacts to the markets differently and each asset within each class may respond differently as well. Putting all your money in one basket may not reward you with the financial security you desire. So it’s wise to get comfortable with each asset class and become a well-rounded investor.
Sven Franssen