What’s in your wallet? There’s probably very little cash.
Yet cash is considered an asset class and it is the asset class we’re most familiar with. Everyone has carried cash at some point. It has value. We have exchanged it for a good or service. Even using a cash app like Venmo, PayPal, or Zelle involves the electronic exchange of currency from one account to another. It’s an asset.
There are four major asset classes. Asset classes are groups of investments exhibiting similar characteristics. Each class is subject to similar laws and regulations, and when something happens in the market, they may often react the same way.
Asset Classes
- Cash and cash equivalents — We’ll get into this below.
- Fixed income — Bonds (include treasuries, municipal or corporate bonds). Thought of as relatively safe.
- Equities — Stocks (can be large or small companies as well as international). Often the highest risk but highest returns.
- Alternative investments — Can include real estate, commodities, cryptocurrencies, hedge funds or other direct investments.
Cash and its equivalents are different because you have easy access to your money and there is little, if any, upfront cost. They are typically very low risk, but they also generate relatively low returns.
Equivalents include:
- Money in your bank.
- High-interest savings accounts which typically require you to maintain a minimum balance.
- Certificates of deposit which require at least a $1,000 deposit and leaving it alone for a set timeframe for only a slightly better return than your high-interest savings account.
- Money market funds are short-term investments providing a fixed rate of return, or yield.
Investing in several different asset classes — including cash — is a good way to increase diversification and add income to your portfolio. Investors have poured billions into cash equivalents such as CDs and money market funds over the last few months as the Federal Reserve has been aggressively raising interest rates. Investors should be cautious about chasing the highest yield if it means sacrificing liquidity, or accessing to your money.
Disclaimer
Investment Information provided is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. It is important to review the ratings of the bonds. Suggest looking for investment grade bonds for less risk. Alternative investments tend to carry higher risk than traditional investments because they are often more complex. Performance information may have changed since the time of publication. Past performance is not indicative of future results.
