The Major Asset Classes
Stocks, bonds, cash and real assets each do a different job in a portfolio. Here is what each one is, what it tends to return and what can go wrong.
Four big buckets
An asset class is a group of investments that behave in similar ways. Most portfolios are built from four: stocks (ownership in companies), bonds (loans to governments and companies), cash (savings, money market funds, Treasury bills) and real assets (real estate, gold and other commodities).
Returns come from price changes and from income such as dividends and interest.
What each one does
| Asset class | Main job | Main risk | Long-run return (rough) |
|---|---|---|---|
| Stocks | Growth over decades | Deep, sometimes long declines | Highest; about 10% a year for U.S. stocks since the 1920s |
| Bonds | Income and stability | Rising rates, inflation, default | Middle; roughly 5% for high-grade U.S. bonds |
| Cash | Safety and ready money | Inflation eats its value | Lowest; roughly 3% for Treasury bills |
| Real assets | Inflation protection, diversification | Long flat stretches, sharp swings | Varies widely |
Long-run U.S. averages before inflation, widely cited from historical market data. Future returns may be very different.
Stocks: the growth engine
Stocks have delivered the highest long-run returns, because owners share in company profits as the economy grows. The price is volatility. In our price data, an S&P 500 fund fell about 56.5% from October 2007 to March 2009 and took until March 2013 to regain its old high, before dividends.
Bonds, cash and real assets
Bonds pay interest and return your principal at maturity if the borrower does not default. Their prices fall when interest rates rise. Cash is the safest in the short run but usually barely keeps up with inflation. Real assets, like property and gold, can hold value when inflation is high but can also go years without gains.
The rate seesaw: higher rates tend to press on stock valuations, just as they push existing bond prices down.
No single best asset
- Each asset class has years when it leads and years when it lags.
- Higher expected return comes with bigger and longer drops.
- Your goals and timeline decide which mix makes sense.
- Funds make it easy to own an entire asset class in one purchase.
Key takeaways
- The main asset classes are stocks, bonds, cash and real assets.
- Stocks have the highest long-run returns and the deepest drops.
- Bonds provide income; their prices fall when rates rise.
- Cash is safe short-term but loses ground to inflation.
- Real assets can help against inflation but swing widely.