Are you facing difficulty in picking the right kind of asset classes? You don’t know in which asset class to invest? Don’t worry, we’re here to help. Before you start using your money, make sure to understand where exactly will you spend your money, and will be profitable enough or not? There are different types of asset classes where you can invest. Each class has its benefit. Let’s look at the introduction of asset classes below so you can find out more about them.
What are Asset Classes? Asset classes are a grouping of investments that are quite similar. The similarities include their behavior in the marketplace, their regulation by the government, and their purchasing process. For example, you buy different fruits including bananas, strawberries, pineapple, however, they all fall under the category, “fruits.” This is how asset classes are, their name and properties would be different, but their category and behavior would be the same. The major types of asset classes include equities, cash and cash equivalent, real estate, commodities, and fixed income.
How to Pick Asset Classes? For picking asset classes for investments, you need to keep the following things in mind.
Follow the 80/20 Rule: Pareto Principle, also known as the 80/20 rule, means you will get 80% of outcomes by putting 20% effort into something. This means low investment offering a higher return. So basically, invest where you believe you’ll eventually get a higher return. For example, work hard and make enough money on buying yourself a property in a commercial area. Now after a few years, that property would have a higher value, resulting in you in more profit.
Go for Diversification: Invest 50/50 in two or more than two asset classes for a higher return. This idea can be further understood by the famous economist and a noble prize winner, “Harry Markowitz” who mentioned that you can earn even more if your portfolio is diversified. He quoted an example that a $100 investment in S&P 500 in the year 1970, would have raised about $7,771 if closed in 2013. Then investing the exact amount over the same period in S&P GSCI, would have raised about $4,829 in 2013. Now, if you use a 50/50 rule, and make it a bit diversified by investing $50 in S&P 500 and another $50 in S&P GSCI, you would have had $9,457 as total investment in 2013.
Choose the 120 Investment Rule: Just like your personality, your age also matters. If you are reaching the age of retirement or are getting older and can no longer make high income in the future, then you must not risk making higher investments as it might put your account balance at risk. Instead, follow the 120-investment rule. In this rule, you subtract 120% with your current age. Whatever the result you get, will be the money you can place on your stocks. The left-out money will go into bonds. Therefore, a 35-year-old would invest 85% in stocks, and the remaining 15% in bonds. Keep in mind the remaining is out of 100%, not 120%.