All asset classes compared
Here you see everything from this level at a glance: what each asset class does, what it costs, how much it swings and what it's good for.
Learning objective: After this lesson you can compare the main asset classes by cost, volatility and purpose.
No investment is good or bad in itself. It either suits a purpose or it doesn't. The same four questions help you every time. Does it earn anything? How quickly can I get at my money? How much does it swing? What does it cost?
Assets With and Without Income
Shares, bonds and property earn something. Gold, commodities, cryptocurrencies and collectibles earn nothing and depend only on the price. This dividing line is one of the most important in the whole level.
How Fast You Can Access Your Money
You can get at your money immediately with instant access savings, shares, ETFs and large cryptocurrencies. It's tied up in a fixed term deposit until the term ends, in property often for months, and in collectibles sometimes for a very long time.
What This Means for You
For you that means: your emergency fund goes into instant access savings. Money for goals three to ten years away you invest in a mix. For building wealth over the long term you use mostly broadly spread shares. Everything else is an addition, if you understand it and really want it.
A helpful split separates investments that earn something from those that don't. Investments with ongoing income can be valued by that income. So there's a yardstick the price orients itself to in the long run. Investments without income don't have that yardstick. Their price depends more on expectations and mood, and their volatility is therefore usually higher.
Liquidity and Sale Price
The second question is liquidity, whether you can sell quickly at a fair price. Investments that are hard to sell often pay a bit more as compensation for that drawback. But they carry a double risk. You usually need your money urgently exactly when the market is difficult too, namely in crises. And that's exactly when it's hardest to find a buyer.
How Assets Interact
The third question is how an investment moves relative to your others. Whether an addition improves your portfolio depends less on its own expected return than on how it affects the swings of the whole. Even an investment with a lower return can improve your result if its correlation with the rest is low enough. More on this in level 5.
Summary
- One of the most important dividing lines: does the investment earn anything or not?
- Investments that are hard to sell can't be sold exactly when you need money.
- Whether an addition helps depends on how it moves relative to the rest, less on its own return.
Did you get it?
Which dividing line between asset classes is among the most important?
Whether the investment earns something or depends only on the price.
Why is an investment that's hard to sell doubly dangerous?
Because you usually need your money exactly when it's also hardest to find a buyer, namely in crises.
What decides whether an addition improves your portfolio?
How it affects the swings of the whole portfolio, in other words its correlation with the rest, less its own return.
Check your understanding
Your task
Enter your holdings, or a sample portfolio with asset classes of your choice, into the portfolio x-ray. Write down which of them produce ongoing income and which depend only on the price. Also note, for your emergency fund and for a goal five years away, which of the four questions (income, access, volatility, cost) weighs most in choosing an asset class.
Related
- What a cryptocurrency isStage 1
- Gold and precious metalsStage 1
- Currency riskStage 2
- Matching questions for this stageQuestions