How to Choose An Asset Class That Suits Your Risk Tolerance
UPDATED: March 2022
How to Choose An Asset Class That Suits Your Risk Tolerance - Do you want to learn how to start investing on your own but don't know where to start from? We will be sharing some pointers to help you reach your investing goals and secure your financial future.
How to Choose An Asset Class That Suits Your Risk Tolerance
The first thing you need to know as an investor is how much money you are willing to risk in exchange for higher returns. For that, you will need to learn about your risk tolerance.
Generally, the riskier an investment is, the higher the return is going to be as well. This is the main reason why it is so important to learn how to choose an asset class that suits your risk tolerance. Even though it is tempting to invest in riskier stocks, it is best if you choose to invest in various asset classes.
What Is An Asset Class?
An "Asset Class" is a group of investments all similar in nature, and you choose to invest in one asset class or various classes. Diversification or a mixture of asset classes gives you a portfolio that is not only well-rounded but can withstand the ups and downs occurring in the stock market. For example, a diversified portfolio would own various individual stocks for different sectors, invest in a mutual fund, and own and rent out several real estate properties.
To help you out, we will share the basic asset classes for investors depending on their level of risk. These include:
Cash
It also consists of cash equivalents and is considered the safest investment since it has a steady value, even when inflation occurs. The best way to increase your cash reserves is to invest in a savings account that pays interest.
Bonds
These are called fixed income or debt as well, and it's when you lend money to an institution, and, in return, you will be paid interest. Examples of bonds are deposit certificates and mutual bonds.
Real Estate
When you own physical property, you can invest in a REIT and own a small part of the property. You should keep in mind that real estate investments require a long-term commitment.
Stocks
When you own shares in a company, it is the most common asset class. However, you need to keep in mind that investing in stocks can be risky, depending on the company. Young companies are riskier, but even established companies can go bankrupt due to lawsuits or unexpected changes.
Futures and Derivatives
When you're speculating on the future price of an asset, these can be complicated, but, in essence, it's a commitment between the involved parties to sell or buy an asset for a predetermined price and date in the future.
Commodities and Precious Metals
Commodities are similar to real estate as you own a physical thing. You can trade them but don't need to possess them, and there are several ways you can sell and buy commodities, such as investing in an ETF or futures contracts.
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