5 Asset classes | 5 Major Assets classes you should invest your money

Most people dream to be financial independent and retire early with financial security. In order to achieve this stage, one should invest in various asset classes and we have shortlisted 5 Asset classes one should invest their money in to achieve their financial freedom. Ensure to read about the last one, as it is currently not that popular in the masses.

Asset 1: Stocks or Equity

Stocks or equity is one of the most powerful wealth building asset one should have in their portfolio. A stock is a part ownership of a company.

This means if you are Apple company’s stockholder, then you are a part owner of that company.

The objective to invest in a stock of a company is that the investor believes in that company and estimates that Stock price will increase in the future. Value of stock increases with the increasing profitability of a company and it serves as a stream of passive income to the stock holder.

If one invests $1000 in a stock at $100 Per share i.e you received 10 Shares in a Company. After 1 year of investment the stock price appreciates to $ 120 per share, this means there is an appreciation of 20% in the Stock price. Profit on your investment = $ 200 ( 10 Shares X 20 $ ( Proft of 20 per share) = $200 Profit on investment)

Second advantage of investing in stock market is Liquidity. If you are in urgent need of money, you can sell the stocks and get the cash in your bank account. You might have to book loss if stock market is performing negatively, to avoid such instance one should plan proper asset allocation and invest in Fixed income instruments to lower the risk.

Risk :High, Equity markets are volatile and one should diversify investment in other asset classes such as bonds or real estate.

Reward :High, Equity market can easily grow with CAGR of 14% and above, in Bull run one can expect equity market to generate more than above average returns.

Asset 2: Bonds, Fixed Income Instruments

Bonds or Fixed income instrument is an asset class which provide its investors with fixed and predictable income source.

These instruments are essentially loans by investors to the borrowers. In return for lending their money, the borrowers provide periodic interest payments to its investors and the principal at the maturity date.

Fixed income instruments ideally provide its investors with returns slightly higher than inflation in the economy and provide safety to your portfolio with stable and consistent returns.

Common example of Fixed income instruments are Bonds, Fixed deposits, Treasury Securities, Corporate Bonds, Municipal Bonds, Certificates of Deposit, Fixed Annuities, Preferred Stocks, Asset-Backed Securities etc.

The risk of investing in Fixed income instruments are Credit Risk, Liquidity risk, Interest rate risk etc.

Risk :Medium, Bond investment has various risks such are default risk and interest rate risk. One can invest in government securities to lower default risk.

Reward :Medium, One can expect steady return in bond market and can get returns slightly higher then inflation.

Asset 3: Real Estate

Real Estate is an asset class which is most popular investment instrument for our previous generation of investors. Real estate is time tested asset class which has provided generational wealth.

One can invest in real estate by leveraging and generating cash flow, which means one can take a home loan from bank to buy real estate and enjoy rental income and part of it can go towards its EMI payment.

For instance, if you had invested in a property generating $2,000 in monthly rental income and the property’s value increases by 8% annually, you are not only receiving rental income but also accumulating equity.

The best part of Real estate is that its tangible in nature. This means it is something you can see, feel and touch unlike stocks which are just present in digital format. Owning a real-estate property also acts as a status to its owners. Real Estate Investment Trusts (REITs) offer a way to invest in a diverse portfolio of assets, starting with as little as $1. However, the key is to conduct thorough research, evaluate historical and future market trends, and seek advice from real estate professionals.

Risk :Medium, Real-estate has various risks such as liquidity risks, property management risk, tenant risk etc

Reward :Medium, One can expect their property to grow by 10.60 % Yearly as per official records.

Source – US Bank.

Asset 4: Entrepreneurship or Business

Entrepreneurship or starting your own business has the potential of achieving financial success and independence. An entrepreneur has the potential to earn multi-fold income in fraction of time as compared to a salaried class employee.

An entrepreneur has the option to follow their passion, transform their passion into a profitable venture and generate generational wealth for him and his upcoming generations.

An entrepreneur has complete control over his time, nature of work and his income is not bonded to a set limit. One must consider that cashflow for a business, specially at the initial phase is very uncertain and can at times be 0 or can also be negative.

Entrepreneurship also come with its risks and uncertainty and that is the reason one should pick a right business model. As per official records, about 20% of new businesses fail during the first two years of operations, 45% during the first five years, and 65% during the first 10 years. Therefore, Entrepreneurship has a huge potential of generating income, however also has high degree of risks.

Risk :Very High, Businesses are very risky in nature and 8/10 business fail inearly stage.

Reward :Very High, Businesses if ran correctly can generate generational wealth in fraction of time.

Asset 5: Cryptocurrencies

Cryptocurrencies as an investment instrument is a new age asset class available to current investors.

Cryptocurrencies has the potential to generate significant returns in a very short amount of time

Cryptocurrencies is considered to be very risky and is very volatile in nature and one should only invest small proportion of portfolio in Cryptocurrency.

Cryptocurrencies generated a return of almost 500% in 8 months, period between Sept 2020 to April 2021. The same cryptocurrencies fall by 40% in next 2 months.

Cryptocurrency is known to be purely speculative and often driven by hype. This makes it a risky investment for most individuals. It is crucial to perform extensive research and stay informed when considering investments in this area.

Risk :Very High,Cryptocurrencies are very volatile and can move in both directions widely.

Reward :Very High, Cryptocurrencies can generate a lot of wealth if one can time the market and exit at correct time at market peak,

Cryptocurrency Wiki.