Nowadays, investors can access various investment asset classes to build a well-diversified portfolio. Familiarizing oneself with the available asset classes can help in this regard. This article introduces you to the most frequently encountered types of assets and their basic characteristics.
Stocks / Equities
Stock represents partial ownership of the business you are investing in. You can own stocks for your favorite companies, like Apple, Google, Starbucks, Nike, Visa, and more. You can also gain exposure to various sectors, such as technology, consumer, energy, healthcare, financials, etc.
Stocks are traded in the stock exchange and can be bought and sold via your broker.
Stocks are usually valued based on their ability to generate cash. You can value a stock using different methods like discounted cash flow, P/E ratio, P/B ratio, and ROE, among others. In general, investors should understand the underlying business they are investing in. This includes their market landscape, competitive moat, financial health, management competency, and overall business model.
Bonds
Governments and companies typically issue bonds to fund their operation. Investors can buy this bond and receive interest payout for the duration of the bond. At maturity, investors will get the principal back. It is like lending your money; you will get an interest payment in return.
Do note there is a risk that the bond issuer may be unable to pay back the promised interest and principal. This is known as default risk. Rating agencies provide a risk level assessment for bond issuers to help investors gauge the potential risks associated with investing in their bonds. For example, Singapore government bonds have the highest investment grade rating, implying the lowest risk of default.
REITs
Real Estate Investment Trusts (REITs) are an asset class where investors own partial ownership in real estate portfolios. For instance, by investing in a REIT, you can partially own a diverse portfolio of shopping malls and office buildings managed by the REIT.
REITs invest in income-producing real estate and distribute most of the income as dividends to the unit holders. For example, a REIT which owns an office building will derive its revenue from the rental income of its tenants. This income will be distributed to the unit holders quarterly or semi-annually. Like owning a stock, owning a REIT enables investors to receive a share of the profit generated by the REIT real estate portfolio without physically owning and managing those properties.
Like stocks, investors should consider various metrics before investing in a REIT. Investors should generally understand the portfolio composition, geographical and sectoral exposure, leverage ratio, debt profile, occupancy and tenants profile, and financial health of the REIT.
For further exploration, look at our list of Singapore REITs and the summary of their financial data.
Physical Real Estate
This should be one of the most common asset classes we all know of. Physical real estate can be in the form of houses, apartments, shophouses, lands, etc. In addition to the general property price appreciation, you can rent your property to earn additional rental income.
Many investors opt to buy properties using a mortgage. This type of debt is generally considered safe, as physical property prices tend to be steady. Nevertheless, try to avoid over-leveraging yourself.
The main downside of buying physical real estate is the relatively high downpayment amount you need before you can make the purchase. You are, unfortunately, priced out of this asset class until you have the required downpayment.
Commodities
Commodities are primary agricultural products or raw materials used to produce goods. Some examples are gold, silver, oil, and natural gas. These commodities usually rise along with inflation; thus, exposure to them can help hedge against inflation. Commodities tend to follow a different market cycle compared to other asset classes, making them helpful in minimizing the effects of market fluctuations.
You can purchase the physical commodities, such as buying gold bars, and store them yourself, or you can also buy a fund that helps manage the physical commodities for you.
ETFs
ETF allows investors to buy a basket of stocks (or bonds, commodities, etc) at once. For example, a single ETF tracking the S&P500 index can expose you to the top 500 companies in the United States. Much simpler than buying 500 different stocks yourself, right?
ETFs trade just like regular stocks on the stock exchange.
Some ETFs have a more specific investment objective, such as focusing on large-cap, small-cap, technology sector, healthcare, etc.
ETF suits investors who prefer to be more ‘passive’ with their investing strategy. It allows investors to enjoy diversification with minimal effort and cost.
Cryptocurrencies
Cryptocurrencies are digital, decentralized, and encrypted mediums of exchanges or assets based on blockchain technology. The most popular one is Bitcoin. There are thousands of other cryptocurrencies, each serving different purposes, such as medium of exchange, utility, governance, platform currency, etc.
As an emerging asset class, cryptocurrency market capitalization is still relatively small; therefore, prices can be very volatile. As a precaution, investing in cryptocurrencies carries a very high risk. Please ensure you understand what cryptocurrency you want to invest in before making any investment decision.
Summary
Investors have access to various asset classes when building their investment portfolios, each with distinct characteristics. To minimize risks, investors usually diversify their portfolios across multiple asset classes. Certain asset classes may perform better during specific market cycles, so a well-rounded mix of asset classes can help manage the impact of market volatility.
As the next step, you can learn more about the risk vs. reward for these asset classes and how to construct your investment portfolio to suit your investing objective.
