Why get familiar with asset classes
Before discussing asset allocation, it helps to understand the basic characteristics of each category. The sources of volatility, return profiles, and liquidity differ across categories, and those properties shape the role each plays in a portfolio.
This article discusses the category level only — it does not compare specific products, tickers, or issuers.
Stocks
Definition: securities that represent ownership in a company. Holders share in the firm's future profits and growth, and also bear the risk of its operations.
Characteristics:
- Potential return sources: price appreciation (capital gains) and dividend payments
- Volatility: typically the highest among the major categories
- Liquidity: generally good for exchange-listed stocks
- Relation to inflation: over the long run, corporate earnings reflect price levels
Common ways to classify: by market — Taiwan stocks, US stocks, emerging markets, developed markets; by size — large, mid, small cap; by sector — tech, finance, consumer, healthcare, and so on.
Bonds
Definition: securities representing debt claims on a government or corporation. The issuer promises to pay interest on a set schedule and return the principal.
Characteristics:
- Potential return sources: coupon income and price changes
- Volatility: usually lower than stocks, but not zero
- Liquidity: high for government bonds; some corporate bonds trade thinly
- Rate sensitivity: when market rates rise, the prices of existing lower-coupon bonds fall; long-duration bonds are more rate-sensitive
- Credit risk: if the issuer defaults, principal or coupon may not be recovered
Common ways to classify: by issuer — government vs corporate; by credit rating — investment grade vs non-investment grade (high-yield); by maturity — short, medium, long duration.
Real-estate-linked assets (REITs)
Definition: real estate investment trusts. Real estate is securitized and publicly traded; investors hold an indirect ownership stake in a basket of properties.
Characteristics:
- Potential return sources: rental-income distributions (dividends) and changes in property values
- Volatility: between stocks and bonds, though during severe stock selloffs it can behave more like stocks
- Liquidity: listed REITs have exchange-level liquidity; the underlying physical real estate is illiquid
- Rate sensitivity: rising rates generally pressure REIT prices
Common ways to classify: by property type — office, retail, residential, industrial, data center, healthcare, storage; by region — Taiwan REITs, US REITs, Asia-Pacific REITs, and so on.
Cash and cash equivalents
Definition: demand deposits, time deposits, money-market funds, short-dated bills — high-liquidity, low-volatility instruments.
Characteristics:
- Potential return source: interest
- Volatility: principal volatility is very low
- Liquidity: usually available immediately
- Inflation risk: real purchasing power may erode over time
- Role in a portfolio: emergency fund, short-term capital needs, dry powder for rebalancing
Considerations beyond the four categories
This article covers the four most common categories. In practice there are other classifications and instruments (commodities, FX, alternatives, etc.), but for a typical retirement-oriented portfolio, stocks, bonds, REITs, and cash cover most situations.
Once you understand the categories, the next step is usually how to decide the percentages — see other articles on this site covering age rules, rebalancing, and inflation.