What are asset classes and what should I know about them?

Today we’ll answer 2 key questions to help you understand what is and should be in your investment portfolio:

• What are asset classes?

• What are key characteristics of each asset class?

What are asset classes?

The term “asset class” is a fancy finance term to name and group similar investments. The key asset classes that exist today:

• Cash & Cash equivalents: aka cash or things very similar to cash (like treasury bills)

• Fixed income (incl. bonds): when you loan money to another company / institution / the government and are paid a pre-agreed amount for interest payments

• Stocks (aka equities): shares / ownership of a publicly listed company

• Commodities: physical items you can buy and invest in, like oil, gold, or wood.

• Alternative investments: this could include a whole variety of investments including real estate, art, wine, venture capital, private equity, and more.

What are key characteristics of each asset class?

Cash & cash equivalents: have a return heavily tied to the federal funds rate. When the rate is low, cash earns a low return; in a high interest rate environment like the one we’re currently in, cash earns a higher return over 5%. This asset class tends to have the lowest risk because your money’s either cash (aka it’s not invested), or it’s invested in government back treasuries (the lowest risk investment you can have).

• At Plenty: We’ve boosted your cash returns with our Cash+ goals to 5.05% APY*.

Fixed income: it might be strange to think of bonds as a loan, but that’s usually how they are structured. It’s also why you can have an upfront agreement where you know how much you’ll get paid. A treasury bond can be structured where you loan the government $10,000, then the government pays you $600 every year (or a 6% rate), until the bond expires and they pay you back the $10,000. Fixed income structures can be with the government or companies; there’s usually a low risk for government fixed income assets assuming you also believe the government will be around. There’s a higher risk for companies, because a company could always go out of business.

• At Plenty: We automatically include these in your classic and premium portfolios.

Stocks (aka equities): stocks tend to have higher average returns over time, but there’s more risk with stocks because they’re inherently the risk of individual companies. Take Tesla… if there’s a lot of demand for Tesla cars, then Tesla stock usually goes up. When they have an issue with manufacturing quickly enough, then the stock might go down. It’s not uncommon for the stock to go up by as much as 10-20% suddenly, or to drop by a similar amount too.

• At Plenty: We automatically include these in your classic and premium portfolios.

Commodities: Increasingly, individuals don’t invest in commodities as often anymore. The final areas where it’s still common tend to precious metals like silver and gold. But if you tried to invest in oil, you might find yourself on the hook looking for places to store hundreds or thousands of barrels of oil. While it doesn’t make sense for individuals, it’s usually critical for companies who use these natural resources for their companies… like a furniture company that relies on a steady stock of wood.

• At Plenty: When we invest in stocks, we invest in companies that produce commodities (ie. natural resource companies), so you do get exposure in your classic and premium portfolios.

Alternative investments: There’s a wide range of alternative investments. The more structured types of alternative investments are private debt, private equity, hedge funds, or venture capital funds. They have strict regulation and reporting requirements that ensure that there are best practices to protect investors. The down side for these types of fund, are they’re usually less liquid (aka, it’s harder to pull the money out if you might need it). That makes the commitment of investing in these funds much higher, because you might not be able to pull money out for upwards of 10 years.

But waiting can pay off. The top 25% of private funds averaged a 21.3% return (source: Nasdaq) whereas stock bond portfolios tend to return a range between 5-10%. It’s easy to see why wealth families keep up to 46% of their wealth in alternative investments according to the J.P. Morgan Private Bank Global Family Office Report at the highest tiers of wealth (source: Cnbc 2024).

The less structured investments include things like wine, scotch, art, baseball cards… you name it, if there are people who believe in the value of it and want to own it, it’s potentially investable.

• At Plenty: Coming soon! Plenty’s working to bring you access to alternative investments (incl. PE funds) as well; if this is important to you, send us an email to join our priority wait list here.

Sources

Ganti, Akhilesh, “What Are Asset Classes? More Than Just Stocks and Bonds.” ****Investopedia. April 2, 2024. https://www.investopedia.com/terms/a/assetclasses.asp

Nasdaq eVestment for Private Markets, “Why top quartile is more than a buzzword for LPs.” Nasdaq. October 27, 2023. https://www.nasdaq.com/articles/evestment/private-markets-insights/why-top-quartile-is-more-than-a-buzzword-for-lps

Frank, Robert. “Family offices are looking beyond the stock market for higher returns, new report finds.” CNBC. April 29, 2024. https://www.cnbc.com/2024/04/29/family-offices-look-beyond-stocks-for-higher-return-less-volatility.html

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The information provided herein is for general informational purposes only and should not be considered individualized recommendations or personalized investment advice. The type of strategies mentioned may not be suitable for everyone. Each investor should evaluate an investment strategy based on their unique circumstances before making any investment decisions.

Investing involves risk, including risk of loss. Past performance may not be indicative of future results. Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. We recommend that you consult a tax professional before taking action.

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