Whether you are just starting out your career or looking for new ways to diversify your income streams, anyone worth their salt will tell you the same thing - saving is no way to make money.
The reason is simple. While it can be good to put aside a few bucks to sail you through the hard times, saving does not make you immune to the dangers of inflation. Your rainy-day fund is subject to devaluation, which means your hard-earned cash will slowly turn into less cash as time goes by.
Building generational wealth, however, requires a bit more sleight of hand.
That’s why, by the end of this article, we plan to make you fluent in asset classes, your only realistic gateway to compounding wealth.
There are different types of assets that you can invest in to build wealth. For ease, these assets are categorized into asset classes that share the same characteristics, follow the same laws and regulations, and behave similarly in the marketplace.
The five main types of asset classes are stocks and equities, bonds and fixed-income securities, money-market funds such as cash and cash equivalents, physical assets and commodities like real estate and gold, and futures. Here they are in detail.
Stocks or Equities
Equities, commonly known as stocks, are shares of ownership in publicly traded companies. As the most popular of all types of asset classes, you earn income by buying into a business, which in turn pays you back upon making a profit through dividends or an increase in stock price.
Your stock in a company lets you participate in its successes, and it is your choice whether you would like to claim your dividends on a quarterly basis in the form of cash, re-invest them for growth having claimed your dividends in the form of additional stock, or resell your shares on the stock market for a higher price.
As high-risk, high-reward growth assets, however, they frequently form the largest part of a starter’s portfolio, with investors often choosing to dampen its overall volatility by purchasing bonds, our upcoming asset class.
Bonds and Fixed-Income Securities
When you purchase a bond, you are lending money to a company or government entity for a set rate of interest. As a debt instrument, your interest is paid out in exchange for using your capital throughout the life of the bond, and the principal is returned at the maturity date, which is when the term of the bond ends.
For example, if you buy an EGP 100,000 five-year bond with an annual interest rate of 2%, you will receive biannual payments of EGP 2000.
Known for their low-risk tolerance, fixed-income securities are limited to the agreed-upon interest rate, providing you with a steady and reliable income stream, especially if you’re getting closer to retirement.
Because bond rates are determined by interest rates, bonds are heavily traded during periods of quantitative easing or when central banks raise interest rates.
Money-Market Funds
Cash investments are the most straightforward of all asset classes. By loaning cash to a bank in the form of a Certificate of Deposit (CD), commonly known as “Shahadat”, you are entitled to an interest that is paid out to you on an annual basis until the Certificate expires. For cash equivalents, your investments can readily be converted into cash within 90 days or less.
Since they are sure to produce a return and are insured by your bank, cash investments are low-risk choices, offering you higher liquidity in the short term because you can easily sell them whenever you need the money for a marginal loss in profits.
There are three common types of cash class assets: short-term government bonds, which mature more quickly than typical government or savings bonds; treasury bills, which are short-term debts that mature within one year or less; and commercial paper, a short-term debt that matures in less than a year used by larger organizations.
Physical Assets and Commodities
In addition to investing in equities or bonds, you can easily invest your cash in marketable commodities, such as real estate or gold, knowing for certain that your commodities will retain their value over time, or increase in value resulting in immediate profit upon resale.
While some commodities can be directly purchased on the market, such as NFTs or collectibles, some are purchased through the stock market, such as gold and silver.
Futures
If you have an eye for market movements, futures will help you make a profit on market swings by placing a bet on the future price of a commodity or other security.
Forex trading is another type of futures investment, allowing you to buy and sell currencies on the foreign exchange market, switching up currencies for profit. Unlike the stock market, the foreign exchange market is open all day long five times a week, making it the biggest of all the other types in terms of trading volume.
Now that you know the difference between asset classes, it is important to note that your topmost goal should be portfolio diversification.
By having all types of asset classes within your portfolio, you safeguard your finances throughout the year, taking advantage of the strengths of each asset class and balancing your returns from different sources, which helps you when one item on your portfolio takes a hit.
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