Episode 23: Asset Classes

In creating a target asset allocation, we must decide on the asset classes to utilize. What are the core asset classes? What are the general risk-return characteristics in each main class? What about asset subclasses? Why is there so much variance in risk-return within a specific asset class and subclass?

All that and more in episode 23 on the Wilson Wealth Management YouTube channel.

Questions we discuss, include:

“Are there any themes or commonalities between the core asset classes?”

We discuss the general characteristics between asset classes. As well, how there is significant variance in the general traits within each specific class.

That asset classes and markets tend to be quite efficient. From a investment risk and expected return perspective. So you find that cash is generally the lowest risk (and lowest return) of the asset classes. Because of the certainty, the liquidity, etc., of low risk assets.

“What are the key points in Cash and Cash Equivalents (CCE)?”

We review why cash is so important in a portfolio. Even though it has relatively low returns.

If you wish a more detailed analysis of CCE, please refer to, “Cash and Cash Equivalents”.

What are the key points in Fixed Income?”

Again, a high level look at this asset class.

For much more detail, please review, “Fixed Income Key Terms”, “Money Market Instruments”, “Bonds, Notes, and Debentures”, “Typical Bond Issuers”, “Corporate Bond Variations”, “A Few More Bond Types”.

If you want to learn a little about different features that may be attached to bonds, please read, “Key Bond Features: Part 1” and “Key Bond Features: Part 2”. Bond issuers often attach special features to sweeten the offering for investors. And those features may impact the offering’s risk-return relationship.

Finally, Preferred Equity is usually treated like fixed income for asset class allocations. To find out why, please read, “Preferred Shares” and “Preferred Share Features”.

As you can see, fixed income is much more complex that it may seem at first look. With many different risk-return aspects within the asset class itself.

“What are the key points to Equities?”

Equities may be more complex than fixed income. Even if we only look at common shares.

First, there is the general equity versus fixed income versus cash considerations.

For information on the asset class itself, please review “Equity Asset Class” and “Common Share Characteristics”.

But then there are the multitude of equity subclasses.

For example, investing in equities by style. The value versus growth investing considerations. Maybe your focus is on generating dividend income from equities rather than capital gains.

Perhaps you want to invest based on a company’s market capitalization. Mega companies like Apple, Nestle, and Toyota. Or all the way down to small, micro, or nano capitalize companies.

You can invest by geography. Country or region. Domestic versus International. Developed versus Emerging Markets. Maybe you want to hedge your foreign currency exposure on international equities or perhaps take on the currency risk.

You can invest in sectors and industries. You can invest in specialty niches, such as Environment, Social, and Governance (ESG) or Fintech. Both are hot investing niches currently.

Whatever interest you have, there is probably an equity subclass or investment available. And each has a somewhat unique risk-return profile and asset correlation between other equity subclasses.

This video is a nice overview of the asset classes. When we get into the target asset allocation and actual investments to include, we will revisit some of the core asset subclasses.