Assets Classes are "a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace". They represent the different types of (usually) tangible things that can be owned and be assessed a "valuation".
Public Stocks (Equities) - shares of ownership in publicly-held companies
- Stocks are listed on stock exchanges which are open to the public investment
- Historically, have outperformed other investments over long periods
- Most volatile in the short term
- Returns and principal for a stock fluctuate over time, making funds from the eventual sale of the stock worth more or less than original cost (depends on the stock purchase price)
Private Equity (Private Stocks) - shares of ownership in privately-held and unlisted companies
- Typically, only a few large investors
- Usually focuses on short-term capital extraction and "sale for parts"
- Often financed by leveraged buyouts (loading the target company with new debt to help the PE firm fund the acquisition of the target company)
- Can be designed to turn around the fortunes/profitability of a distressed company by cutting costs, replacing management and changing company direction; in this case the investment is more long-term, but ultimately the goal of PE is to extract a large profit from the sale of the acquired company once its profitability (and thus valuation) has improved
- A "property flip" is a minor/small-scale form of PE
Bonds/Notes/Bills (Fixed Income) - guaranteed bond investments
- Pays a set rate of interest over a given period, then return the investor's principal
- More stability than stocks
- Value fluctuates due to current interest and inflation rates
- Includes "guaranteed" or "risk-free" assets
- Also includes money market instruments (short-term fixed income investments)
- Often comprised of federal government or municipal bonds, notes or bills
- Can also include corporate loans
- The term used to describe this type of debt asset ("bond/note/bill") depends on the length of the debt instrument maturity, with "bonds" typically being a maturity of 10-20 years, "notes" being a maturity of 1-10 years and "bills" (like T-Bills) being a maturity of less than 1 year
Cash and Equivalents (Liquid Assets) - assets that can be quickly and easily converted into immediately usable currency without losing significant value
- Checking and savings accounts
- Certificates of deposit (CDs)
- Money market funds
- Treasury bills
- Treasury notes
- Commercial paper
- Foreign currencies which are easily convertible to the currency you need to transact in
- Liquid assets have the advantage of giving their owner the power to buy things without incurring any debt
Cryptocurrency - a "piece" of (usually limited) digital currency
- The backbone of "DeFi" or Decentralized Finance
- "Digital rare earth material"
- Relatively accessible; mineable and tradable
- "Risk-on" asset; lacks regulation, ESG concerns, highly volatile
- Liquidity has increased with institutional adoption
- Supply varies, some are finite or even designed to shrink in supply and thus deflationary
- No inherent value or utility (like NFTs)
- But(!), cryptocurrency underlies the transactional architecture of a bulk of all untraced, "black market" commercial activity worldwide
- Barring meaningful cryptocurrency regulation, its value is unlikely to ever "go to zero" or not hold some significant value because of its usefulness in facilitating illegal monetary transactions and digital money laundering
Recently, interest in stocks and crypto has spiked while interest in bonds and private equity has remained more muted and stable
Real Estate - investment property (houses, stores, factories, land lots, etc.) and commercial real estate investments
- Helps protect future purchasing power as property values typically rise with inflation
- Values tend to rise and fall more slowly than stock and bond prices.
- It is important to keep in mind that the real estate sector is subject to various risks, including fluctuation in underlying property values, interest rates (which directly influence mortgage rates, which usually compose a large part of any real estate purchase), eminent domain law, and potential environmental liabilities
- Can include "Infrastructure as an asset class"- a broad category including highways, airports, rail networks, energy generation (utilities), energy storage and distribution (gas mains, pipelines etc.)
- Can provide a long-term cash flow, a hedge against inflation, and diversification (low correlation with the top two traditional asset classes: equity and fixed income)
Commodities - physical goods such as gold, copper, crude oil, natural gas, wheat, corn and electricity
- Can serve both as a value store in and of itself (in the case of things that don't expire, like precious metals) and as raw material for the construction and delivery of downstream physical goods and services
- Helps protect future purchasing power as commodity values rise with inflation
- Values tend to have low correlation with stock and bond prices
- Price dynamics are unique: commodities become more volatile as prices rise
References:
https://www.poems.com.sg/glossary/investment/asset-class/
https://cointelegraph.com/learn/overview-of-different-types-of-asset-classes
https://en.wikipedia.org/wiki/Asset_classes
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