If you’re new to investing, you may have heard the term “asset” before — an asset is anything you own that has financial value. In the world of investing, people buy assets with the intention of making money from them over time.

An asset class is a kind of investment category — a group of assets that typically have similar structures, features, risk, and return characteristics. 

Common examples of asset classes include cash, stocks, bonds, real estate, and commodities. 

Why do asset classes matter?

If you think about it like cooking, asset classes are the main ingredients of your investing strategy. And every investor has their own unique recipe — this much of one thing and this much of another. Using asset classes to put together your investing plan is a great way to inform your choices. 

Each class adds different strengths to your portfolio.

Some asset classes change in value more than others. Historically, their prices have seen big swings up and down. Investors call these classes “volatile” — they have the potential to make a lot of money, but they can lose a lot, too. 

Other asset classes haven’t fluctuated as much. Their potential for growth tends to be more conservative, but they’re considered more stable. 

Because this “risk-reward profile” is different for each asset class, some categories will fit your risk tolerance better than others. That’s an important part of forming your investment strategy.

Different asset classes also tend to respond differently to changes in things like inflation and interest rates. When investors talk about diversifying their portfolios, part of what they mean is buying asset classes that move in different directions — so if they’re losing money in some investments, they’re making money in others. 

What are the different asset classes?

The asset classes you choose to invest in will probably depend on your experience and comfort level, but many investors start with these three common asset classes: stocks, bonds, and cash. 

Below, we’ll define each of these — and a few more. 

1. Stocks (equities)

Risk level: Moderate to high
Stocks, or equities, are “slices” of ownership in public corporations — think Amazon or Walmart — that are traded on a stock exchange. While they offer high potential for returns, you’re also likely to encounter substantial losses along the way. Prices fluctuate based on factors like investor demand, company or economic performance, and regulatory or policy changes. 

2. Fixed-income assets

Risk level: Low to moderate
Fixed-income assets like bonds pay regular, passive income over a set period of time. When you buy a bond, you lend money to a government or corporation and receive interest payments that are based on the prevailing market and that particular bond’s risk. At maturity, you receive your initial principal back. 

3. Cash and cash equivalents

Risk level: Low
Cash and cash equivalents include liquid cash or instruments that quickly convert to cash, such as:

  • Short-term certificates of deposit (CDs)
  • Treasury bills
  • Short-term government bonds that mature within 90 days
  • Money market funds

These assets are generally considered very low risk, as there’s very little chance of losing your money. However, the interest rate on cash accounts rarely beats inflation, so the purchasing power of your accounts may still decline over time. 

4. Real estate

Risk level: Ranges from low to high
Real estate can provide steady cash flow and equity appreciation, though the capital required and risk of loss can be substantial, and the taxes can be complicated. You can get your hands dirty by buying rental properties or flipping houses yourself, but this takes a lot of time, effort, and know-how. Or, you can buy into private funds or publicly traded real estate investment trusts (REITs), which are funds that manage properties. Only those that pay at least 90% of their profits as shareholder dividends qualify as securities.

5. Derivatives

Risk level: High
Derivatives are financial contracts that derive their value from an underlying asset. For example, you might agree to buy or sell a certain number of shares of a certain stock (the underlying asset) at a certain price on a particular future date. Derivatives include instruments like options, futures, forwards, and swaps, while the underlying asset could come from many of the other asset classes. Many derivatives are highly leveraged, which can be incredibly rewarding but also incredibly risky. (If things go south, you can end up owing more money than the underlying assets are worth.)

6. Commodities

Risk level: Moderate to high
Commodities are the raw materials that go into other goods, such as agricultural products, industrial or precious metals, and oil products. Since commodity price movements impact the price of final products, investors often use them to hedge against inflation. You can also invest in leveraged commodity assets like futures contracts. 

7. Cryptocurrencies 

Risk level: High
Cryptocurrencies, including Bitcoin and Ethereum, are digital “coins” that record transactions on encrypted internet ledgers, called blockchains. They can be used both as a medium of exchange and a store of value. Cypto is highly volatile — subject to sudden price swings — and carries substantial risk with limited regulation. 

8. Private Equity

Risk level: Moderate to High
Private equity is essentially investing your money into private companies that aren’t listed on a public stock exchange. For example, investors may invest in early-stage companies (venture capital) or borrow money to acquire a company in a leveraged buyout. Due to the nature of this asset class, private equity isn’t easily sold or transferred and often requires a long holding period. 

9. Collectibles 

Risk level: Moderate to High
Collectibles are physical items you can sell for a profit, including:

  • Kids’ toys
  • High-end watches (Swiss-made, like Rolex or Audemars Piguet) 
  • Musical instruments
  • Baseball cards
  • Art
  • Comics
  • Stamps
  • Vintage whiskeys and wines

While this asset class offers enormous diversification potential — and can be an extension of your hobbies or personal nostalgia — your profits may be hit-or-miss. An item’s rarity, condition, market base, maintenance, and insurance costs can all impact your returns. Plus, you’ll have to watch out for counterfeit items and a capital gains tax rate of a maximum 28% when you sell.

How to diversify your assets

Each asset class provides varying levels of risk, return, and liquidity, or the ability to sell your assets. Through diversification, investors try to limit their overall exposure to risk and minimize losses. 

One of the easiest ways to diversify your portfolio is by investing in several asset classes at once. But remember, that’s not the only way. 

You can also diversify your portfolio through:

Liquidity

Best for: Managing cash or locking up capital for the long-term
Short-term investments, like some bonds and CDs, aim to preserve wealth instead of growing it. They’re typically handy for offsetting the impacts of inflation and ensuring you always have cash when you need it. 

Long-term assets, like stocks, real estate, and bonds with multi-year maturities, aim to grow your wealth over time. Diversifying across these asset classes helps smooth out any potential losses while increasing your growth potential. 

Theme

Best for: Sector or thematic focus
Certain sectors perform better during specific economic climates. For instance, essential healthcare stocks may outperform during recessions while manufacturing stocks boom in growing economies. 

Spreading your dollars across industries or themes means you may capture gains at different stages of the economic cycle. You may also minimize your exposure to loss when any particular industry sours. 

Size

Best for: Exposure to different company stages
Market capitalization — essentially, the total value of a company’s issued stock — is another diversification metric. 

Larger companies tend to grow more slowly, but they’re more likely to pay dividends and survive recessions. Smaller companies carry more risk on average but have more room to grow and produce capital gains. 

Investing across a range of market caps, including both large and small companies, is one strategy to try to balance your risk against your portfolio’s potential for growth. For example, younger investors may invest heavily in higher-risk small-cap stocks to accelerate their earnings potential. Meanwhile, investors nearing retirement may stick with a handful of dividend-paying large-cap stocks. 

Funds

Best for: Index tracking, access to professional management, thematic investing
Investors looking to increase diversification may choose financial products like mutual funds and exchange-traded funds (ETFs) to access a wide array of investments.

Mutual funds and ETFs have some differences, but they operate on the same basic principle. These funds buy a basket of securities like stocks, bonds, commodities, or REITs or track an index. They may follow a specific:

  • Strategy, like growth, value, or dividend investing
  • Theme, like environmental, societal, or corporate governance (ESG) investing or socially responsible investing (SRI)
  • Goal, such as trying to “beat” the market

Then, they issue their own shares, with each share containing a tiny slice of every underlying investment. So, instead of buying just one stock at a time, you can invest in dozens or hundreds of assets at once. Funds are especially handy because you can tweak your portfolio to fit your financial goals quickly, regardless of your risk tolerance and capital available.

Track your diversified asset classes with Quicken

Investing in a wide range of asset classes is one of the best ways to diversify your portfolio and limit your losses. 

But adding all these different assets to your portfolio probably means opening several retirement, investment, and savings accounts. And you know what that means: more stuff for you to manage in your busy life. 

With Quicken, you can track all your financial accounts in one place, so you can see your entire portfolio and your true net worth.