What are asset classes?

What are the different types of asset classes?

There are three main classes of investment assets—cash, bonds, and stocks.

Each asset class offers a different level of risk and reward, so each will behave differently over time. Let’s take a closer look at each one.

1 Cash and cash equivalents

Cash equivalents aren’t cash—they’re investments that earn low interest, which you can turn into cash. Examples of cash equivalents include money market, stable value, and some fixed-income funds.

These types of investments are considered the safest asset class and generally designed to provide a degree of stability to your portfolio.

2 Bonds

When you buy a bond, you’re actually lending your money to a government or a business. In return for your loan, you generally earn interest during the life of the bond, referred to as the bond’s yield or income. If you hold the bond to maturity (which means the day the loan is due), you’ll generally receive your original investment (known as the principal) paid back and some yield; however, there are no guarantees. In terms of risk, bonds tend to be riskier than cash, but they also offer a potential for higher returns.

3 Stocks

When you buy shares of stock, you buy a piece of ownership in a publicly traded company. Stock prices are determined by how much sellers are willing to take and how much buyers are willing to pay on the stock market. As a rule, stocks are more volatile than bonds and cash investments—meaning that they can change value frequently. In addition to stocks of a single company, there are stock funds, which are a professionally managed combination of stocks.

Stocks have offered the highest returns over the long term—but they’re also the riskiest asset class.

Choose investments to fit your needs

When you choose investments, you need to consider your goals, risk tolerance, and the amount of time you have until retirement to make sure the investments you choose are appropriate for you. Experts generally recommend spreading your investment among the different asset classes to help you manage risk while you try to also optimize the earnings you may receive.

Depending on your goals and the time you have left before you retire, you’ll need to decide if you should assume more risk to seek a higher potential return. 

Generally, this means to:

• Be more aggressive, and select a higher percentage of stock funds.

• Have a more moderate investment approach, and select a mix of stock and bond funds.

• Be more conservatively invested, and choose more bond funds.

To help you find an appropriate balance between the return you hope to achieve and the risk you’re willing to take on, go online and use a risk calculator, such as this one, or contact your financial professional for help finding the mix of asset classes that’s right for you.