Investable assets refer to those assets that can be easily bought, sold or exchanged on public markets. They are liquid assets that investors can use to build an investment portfolio. The major types of investable assets include stocks, bonds, cash and cash equivalents, real estate, commodities, derivatives etc. When constructing a portfolio, it is important to consider the risk, return, correlation and other characteristics of the investable assets. A good portfolio investment should aim to maximize returns for a given level of risk through proper asset allocation. This article will discuss the main types of investable assets and key factors to consider when investing.
Stocks and Bonds as Major Investable Asset Classes
Stocks and bonds are two of the most common investable asset classes. Stocks or equities represent ownership interest in a company. They offer the potential for capital appreciation and dividends. But stocks also carry higher volatility and risk. Bonds are debt instruments issued by corporations or governments to raise capital. They provide more stable income in the form of coupon payments but limited upside potential. When constructing a portfolio, stocks help provide growth while bonds contribute stability and income. Investors need to evaluate factors like valuation, fundamentals, risk attributes when selecting individual stocks and bonds.
Importance of Asset Allocation with Investable Assets
A critical decision in portfolio management is determining the asset allocation, or the percentage breakdown of investable assets. The appropriate allocation depends on investment objectives, risk tolerance, time horizon and other constraints. A retirement investor may favor more bonds while a young investor can take more risks with stocks. Assets can also be allocated across geographies, market caps, sectors, styles to diversify risks. Proper asset allocation aligns the portfolio to investor goals and optimizes the risk-return tradeoff. Rebalancing periodically maintains the target allocation as market values change.
Alternative Investable Assets beyond Traditional Choices
Investors today have more investable assets to choose from beyond just stocks and bonds. Real estate investment trusts (REITs) offer exposure to commercial real estate. Commodities like precious metals or energy can hedge inflation risks. Derivatives like options and futures help manage portfolio risks. Cryptocurrencies have gained popularity as an alternative digital asset class. Art, wine, antiques are examples of collectible hard assets. Emerging alternative assets provide more tools for investors to fine-tune a portfolio.
Understanding Liquidity and Other Key Characteristics
When evaluating investable assets, liquidity is a critical factor to consider. Liquid assets like large cap stocks can be quickly converted to cash without significant price impact. On the other hand, assets like real estate are relatively illiquid. Other key characteristics include volatility, correlation with other assets, risk-return profile, impact of macroeconomic factors, tax considerations etc. Investors should ensure the investable assets being selected suit their constraints and objectives.
Investable assets constitute the building blocks for construction of an investment portfolio. Major types include stocks, bonds, cash, real estate, commodities and alternative assets. Proper asset allocation using both traditional and alternative investable assets can help investors maximize risk-adjusted returns. Understanding the characteristics of each asset class is key for effective portfolio management.