All asset classes compared
The overview of everything from this stage: what each asset class delivers, what it costs, how much it fluctuates, and what it's good for.
No asset is good or bad. It fits a purpose, or it doesn't. The key questions are always the same: does it generate anything? How fast can I access it? How much does it swing? What does it cost?
Generates something: stocks, bonds, real estate. Generates nothing and depends purely on price: gold, commodities, cryptocurrencies, collectibles. That distinction is the most important one in this entire stage.
Available immediately: savings accounts, stocks, ETFs, large crypto assets. Locked up: fixed-term deposits until maturity, real estate over months, collectibles sometimes for a very long time.
For you, that means: emergency fund in a savings account. Goals three to ten years out, mixed. Long-term wealth building, mostly broad stock holdings. Everything else is an addition, if you understand it and want it.
A useful framework separates productive from non-productive assets. Productive assets generate a cash flow and can be valued using present-value methods, which gives them a valuation anchor that prices gravitate toward. Non-productive assets lack that anchor, which is why their pricing depends more heavily on expectations and sentiment, and their volatility runs systematically higher.
The second dimension is liquidity, understood as the ability to trade promptly at a price close to fair value. Illiquid assets often offer an illiquidity premium as compensation, but carry a double risk: the need for liquidity and the deterioration in tradability typically arrive at the same time, namely during a crisis.
The third dimension is correlation structure. The portfolio benefit of adding a position doesn't come from its expected standalone return, it comes from its contribution to the overall portfolio's volatility. An asset with a lower expected return can improve the overall outcome if its correlation to the rest of the holdings is sufficiently low. This gets explored further in Stage 4.
Summary
- The most important dividing line: does the asset generate anything, or not.
- Illiquid assets become unsellable at precisely the moment you need cash.
- The benefit of an addition comes from its correlation, not its standalone return.
Did you get it?
What's the most important dividing line between asset classes?
Whether the asset generates a cash flow, or depends purely on price.
Why is illiquidity doubly dangerous?
Because your own need for liquidity and the deterioration in tradability typically hit at the same time.
Where does the benefit of a portfolio addition come from?
From its contribution to overall volatility, meaning its correlation, not its standalone return.
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