An Overview of Core Asset Classes and Specialty Asset Classes

When building an investment portfolio, every investor needs to incorporate the three core holdings and, depending on the investor's risk appetite, invest marginal amounts of money in specialized asset classes. Although the specialized assets are not mandatory for a good, long-term return, it can provide added stability in a portfolio as well as enhance returns. As always, specialty assets are intended to be long term holdings.

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Briefly, the three core asset classes that investors need to own in their portfolio are:

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1. Cash. While there is nothing exotic or overly appealing about cash, it does provide the investor with flexibility to enter into attractive positions when the time is right. Depending on the risk profile of the investor and the type of investments held (e.g. mutual funds versus individual securities), cash may or may not be entirely recommended. Still, holding some assets in cash, even just 5%, is a prudent step and allows for the access to capital when one wants to enter a new position.

2. Fixed Income. Primarily taking the shape of bonds or term deposits, the fixed income component of an investor's portfolio will provide steady income. While there is some growth potential in this asset class, the primary objective is to have the portfolio infused with regular cash payments that can be rolled over into longer-term, high growth potential securities or kept in cash so that a larger use can be made of the funds at some future date in the short-term.

3. Equities. This often represents the biggest portion of an investor's portfolio as this is what drives longer-term growth. Despite the instability in the equity markets recently, equities continue to provide better returns over decades than any other asset class. Therefore, the longer one has to invest, the more money one should hold in equities. While this asset class is synonymous with growth, it can also provide income in the form of dividends.

As for the specialty asset classes, there are far too many to number here. Traditionally, most investors will add the following:

1. Income. For the income asset class, this will include high yield investments, corporate/investment grade bonds and, for the high risk bond investor, below investment-grade bonds as well.

2. Equities. Most common types of specialty equity class assets include small cap funds, real estate investments, foreign investments, European/Asian/etc. investment funds, as well as commodity based investments such as energy, minerals, gold and so on.

Clearly, there is far greater variety in the equity class, however there is also far more risk. But once an investor has properly established the core holdings of his or her portfolio, and provided that the risk tolerance supports it, branching out to these specialty classes will often make a great difference to the portfolio's overall performance.

An Overview of Core Asset Classes and Specialty Asset Classes

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Chris has more than 17 years of financial services experience. He currently manages a website about Class B CDL Jobs at Class-B-CDL-Jobs.com.

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