Asset Explained

An asset is anything you own that has monetary value, such as stocks, bonds, cash and real estate.
Apr 15, 2022

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What is an asset?

An asset is anything you own that has monetary value. An investor trades assets expected to grow in value and produce income. Common investment assets are stocks, bonds, cash, real estate and commodities.

Why assets matter

Assets are meant to grow in value after you buy them. Of course, this is not guaranteed, and some assets are riskier than others. But increased value is the goal, which means without any additional spending on your part, you could eventually sell the asset for more than you paid for it

.

Additionally, some assets earn an income. This can take the form of rental property income, dividends paid to shareholders by some public companies, and interest earned on bonds, certificates of deposit and high-yield savings accounts.

Acquiring assets that are expected to increase in value and produce income can help your savings grow faster than if you depended on your paycheck alone. In addition, assets are important for meeting big savings goals, such as retirement.

Examples of assets

Assets fall into several classes based on shared characteristics

. Here is an overview of four asset classes.

Equities

Equities, or stocks, are a share of ownership in a public company. They are traded on an exchange. Stocks can increase in value if the price increases. In addition, some companies pay dividends to shareholders. Long term, stocks have seen average annual returns of more than 10% per year.

Bonds

Companies and governments issue bonds to raise money. For those entities, it’s a form of debt, requiring them to pay back what was borrowed with interest. For investors, it’s a source of income since they earn interest, which is paid as a fixed amount on a consistent basis. The initial investment is repaid after a set amount of time. Corporate bonds have had historical average returns of around 6% per year. For Treasury bonds, it’s 5.5%.

Cash

This includes cash equivalents, such as a certificate of deposit (CD). Cash is valued for its liquidity, meaning it is easily accessible. The trade-off is that it has a low rate of return. One example of cash equivalents, Treasury bills, have had average annual returns of 3.5%.

Tangible assets

Tangible assets are physical, such as a building or a collectible. However, real estate and commodities, such as oil or gold, are also an example of alternative assets — a broad category that includes crypto.

Asset allocation and diversification

Risk is inherent to investing. Assets vary in how risky they’re considered to be. But as risk increases, so does the potential reward. To guard against risk, while still inviting that reward, investors acquire a mix of assets

. For example, someone might have an investment property collecting rent and own stock that pays dividends every quarter.

Asset allocation is a tool used to ensure a portfolio includes a variety of asset classes. It refers to how much of an investor’s portfolio is made up of each asset class. Asset allocation depends on several factors, including how much risk the investor is willing to take and how much time they have to reach their financial goals.

Diversification is another tool used to mitigate risk. Rather than buying a single stock, a diversified portfolio holds stocks from multiple companies across multiple industries. That way, the risk is spread out so that one stock’s poor or stagnant performance doesn’t have an outsized effect on an investor’s portfolio.

Asset management

Asset management refers to the oversight of an individual’s or entity’s investments. An asset manager’s goal is to get the best returns possible for their clients' investments.

Asset managers may earn a commission or receive a fee based on the total value of their clients’ investments, which are known as assets under management. Fees vary depending on factors like whether assets are actively or passively managed.

Some large banks, as well as independent firms, offer asset management. U.S.-based BlackRock, Vanguard Group, Fidelity Investments and State Street Global were the four largest asset managers in 2020, according to an October 2021 study by the Thinking Ahead Institute, a nonprofit investment research organization. Globally, the 500 largest firms held assets under management of $119.5 trillion in 2020

.

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