Asset allocation is about more than just diversification. Each type of asset or asset class inside your investment portfolio serves a very different function. But most Financial Advisers don’t understand these functions and your money suffers.
Assets should be divided into four main categories:
2. Real Estate
1. Interest-earning assets such as cash and bonds give you access to capital on a short-term basis. If you need access to liquidity, bonds and cash are the first place you should look. Bonds are also hedge against deflation.
2. Real Estate is one of the best ways to protect you from inflation. It is one of the most inflation sensitive assets you can own. Inflation decreases your purchasing power as the prices of goods and services increase, and it is a major risk to your long term financial goals. Usually owning your primary residence is enough to have at least a third of your assets in real estate. However, if you have built up a bit more wealth, you might need to purchase real estate beyond your home in order to keep your portfolio balanced.
3. Commodities are actual physical goods like corn, soybeans, gold, crude oil, etc. In years past, using this asset class was done only by professionals. But since the addition of commodity based mutual funds and exchange traded funds, this is no longer the case. Recently we have all been hit by rising prices at gas stations and grocery stores. By adding commodities to your mix, it provides a hedge against rising prices of goods.
4. Equity Investments should be held long term, and typically outperform all other asset classes during periods of economic growth. Equities are broken down into large cap, small cap, international stocks, and emerging markets. Each area of equities also serves a different purpose and amount of ownership should be based on you and your goals.