The term “Investments” is very broad. As I discussed in a previous article, an investment is anything you purchase/put money into with the expectation that it will increase in value and provide you with profit (not always monetary profit, it could be an advantage or benefit of any kind). You can invest in thousands of different things. You could consider paying for college an investment because you’re relying on a degree to bring you more income. You could consider purchasing a treadmill an investment in your health. When it comes to personal finance, the most common investments are assets. An asset can be anything that has value. In today’s article, we’ll be discussing what an asset class is.
Many assets share characteristics that make them similar. These similar assets are grouped together into sections called “Asset Classes”. Each asset class has a few defining traits that an asset must have for it to be included in that specific class. Some traits are obvious. For example, gold and silver are both metals, so it would make sense they would be grouped together. Other similarities are less obvious. Let's take a look at gold and corn. One is a precious metal, and the other is eaten with butter. There aren't too many clear similarities. However, they’re both in the same asset class, both being considered commodities in the “real assets” class. This is because both a 1 pound bar of pure gold can be exchanged for another 1 pound bar of pure gold without any additional fees, even if one bar was made in England and the other was made in South Africa. Similarly, a ½ pound of corn can be exchanged for another ½ pound of corn. Despite the farmer of the corn, the exchange is considered equal. Gold can be exchanged for gold, and corn can be exchanged for corn. Each pound of gold is the same, just as each pound of corn is the same.
While there are many different asset classes, the five main ones are stocks, bonds, real assets, cash, and alternatives. I’ll summarize all of these in another article, and then dedicate an entire, in-depth, article to each class.
In short, assets can be anything with value. Asset classes are based on similarities between assets, with some similarities being obvious, and others less so.