What investors need to know about major asset classes
Investing can sometimes be complex and investors should always attempt to understand how investible instruments work before putting money in them. One way of making investing more comprehensible is by breaking them down into different groups of similar characteristics. This way, investors can pick and choose the investible groups they are most comfortable with. This should be done with the investor’s risk and return profile in mind, as either some of the investible instruments may not be suitable for the investor but the investor chooses to invest in it or some of the more suitable investible instruments are relatively unheard of or unknown to the investor. One of the ways the investing universe can be grouped or categorised is by asset classes.
Each asset class has its general characteristics in terms of risk and return, though investors should be wary that intra-asset risk and return can also vary greatly. Investors should not treat each asset class as silos but know that these asset classes are part of the larger financial ecosystem with varying correlations, which ultimately should affect how the investor’s portfolio is allocated with the selected asset classes. In other words, allocating the portfolio with the right composition of asset classes is equally as important as trying to pick individual financial instruments within asset classes.