Understanding Asset Classes and Sub-Asset Classes: The Building Blocks of Smart Investing
Nothing is more satisfying than a well-organized space, everything in its place, grouped with like objects. We do the same with investments, organizing them into asset classes, the classes will behave similarly and exhibit similar characteristics, and they are also subject to regulation. Primary asset classes include equity/ stocks, fixed income/ bonds, real estate, commodities, and cash equivalents. The asset classes will respond differently from each other in the marketplace and will have their own risk portfolio. To diversify your portfolio, you would choose from different asset classes to minimize risks and enhance potential returns.
Saudi Arabia has begun liberalizing its stock Exchange, Tadawul, in a drastic effort to diversify from its oil dependency. According to the Kingdom’s Vision 2023, Saudi Arabia is opening its doors to foreign investors, increasing market liquidity, and driving growth in various sectors. This growth has expanded the list of asset classes and sub-asset classes , and both assets and sub-classes are now available to investors and include equities, sukuk (fixed-income instrument), real estate, and so much more.
Having an understanding of the different asset classes and their sub-asset classes is important for investors and allows for strategic positioning, capitalizing on emerging opportunities. We will be taking a look at a list of asset classes and sub-asset classes, exploring their unique characteristics and their roles in portfolio diversification.
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What Are Asset Classes and Sub-Asset Classes?
It is important to understand the behavior of various types of investments, which is usually at the heart of a well-structured investment strategy. Asset classes refer to categories of investments that react in a similar manner to each other, market conditions, and follow the same financial principles. These groupings can be further classified into sub-asset groups, these sub-groups allow for making targeted investment decisions. Understanding the list of asset classes and sub-asset classes will help you, as the investor, make more informed decisions based on your goals.
To illustrate this, we could look at the broad asset class of equities. Within the equity grouping, there would be subcategories or sub-asset classes like small-cap stocks, emerging market shares, and dividend-paying stocks. Fixed income can be sub-categorized into high-yield corporate bonds, government bonds, or sukuk. The more intricate the grouping becomes, the more financial control the investor will have.
Having an understanding of asset classes and sub-asset classes is vital for investors, especially since they behave in an organised manner, allowing the investor to manage risk and returns effectively. It is possible that some asset types will behave differently under the same economic conditions. With an understanding of asset classes and sub-asset classes, investors will be informed of the associated risks involved with certain groups of investments, as well as manage their returns. Investors will often select investments over multiple sub-asset groups to ensure they are not overly reliant on one single type of investment.
Asset classes and sub-asset classes provide a strong foundation for a diverse, well-rounded portfolio. Whether you are aiming for aggressive growth or a slower long-term investment option, understanding these categories will help you as an investor grow your wealth, manage your risk, and create a diversified portfolio. It doesn’t matter whether you are conservative or aggressive in your approach; your ideal strategy can be found in the diverse list of asset classes and sub-asset classes available today.
Major Asset Classes and Their Sub-Groups: A Portfolio Blueprint
Understanding the major asset classes, along with their risks and return profiles, allows you to build a strong investment portfolio. The major asset classes, along with their sub-classes, have vastly different risk-return profiles, so it is vitally important that you conduct thorough studies of the classes to ensure that whichever investment asset class you choose, it suits your needs, risk tolerance and long-term financial goals.
| Major Asset Classes | Description | Common Sub-Asset Classes |
| Equities (Stocks) | Ownership in companies often has higher risk and return potential. | -Large-Cap, Mid-Cap, Small-Cap
-Growth vs. Value Stocks -Domestic vs. International |
| Fixed Income (Bonds) | Lower risk than equities, bonds are debt instruments that provide a regular income. | -Government Bonds (Sukuk)
-Corporate Bonds -Municipal Bonds |
| Real Assets | Often used as an inflation hedge, these are tangible or physical assets. | -Real Estate/ REITs
-Commodities (Gold, oil, Agriculture, etc.) -Infrastructure |
| Cash & Equivalents | High liquidity and low-risk investments. | -Treasury Bills
-Certificates of deposit -Money Market Funds |
| Alternative Investments | Non-traditional assets that are often used for growth and diversification. | -Private equity
-Hedge funds -Venture Capital -Cryptocurrencies |
The traditional list of asset classes and sub-asset classes has long formed the backbone of most portfolios, even though the investment landscape may be evolving.
Emerging & Alternative Asset Classes: The New Frontier of Investment
The most important part of being human is the ability to adapt. Let’s shift this perspective to the world of investment. Remaining static will mean we miss out on new trending investments, with the financial landscape evolving, there are great new opportunities to take advantage of. Emerging and alternative asset classes do not fall into conventional categories of stocks, bonds, or even cash. It is important to remember what happened with Bitcoin while thinking of these new emerging asset classes.
While alternative asset classes used to just include: private equity, Hedge funds, infrastructure, and commodities. Today, we are seeing the younger, more tech-savvy investor investing in cryptocurrencies, art, collectibles, as well as green and ESG-focused funds. These “new kids on the block” complement the existing list of asset classes and sub-asset classes, allowing more dynamic strategies going forward.
New platforms like Gamma Assets are leading the way, they offer investors a curated access to both traditional and alternative asset classes and sub-asset classes. They offer the investor a simple method of entry into the investment space, with the focus on fractional tokenized ownership in real estate. The tools and insights make it a smooth process to invest for both seasoned investors and new investors alike.
If we focus on Saudi Arabia for a minute, we will see how these changes align with the Kingdom’s Vision 2023 and its plan to liberalise the Saudi exchange (Tadawul exchange). Opening the Tuduwul exchange to foreign investment means allowing for financial innovation. Foreigners can now get involved in opportunities in the Shariah-compliant alternatives, REITs, and private market vehicles.
Emerging asset classes are a little different, as they usually refer to newer financial instruments that are gaining pace and recognition. These would include new Fintech companies, start-ups, sustainable energy ventures, or even, impact investment vehicle. (Impact investing vehicles refer to tools or funds that are specifically designed to bring about positive outcomes and returns, either socially or environmentally.) These asset classes may have more risk associated due to volatility and a limited track record, but they also offer great rewards through substantial growth.
These emerging and alternative asset classes are rapidly changing the investment space and are proving that they are not just supplementary but becoming essential. Integrating the asset and sub-asset classes into your portfolio can provide resilience and diversity for a forward-thinking investment strategy. With a strong understanding of the list of asset classes and sub-asset classes, investors are better prepared to create resilient portfolios.
Choosing the Right Asset Mix for Your Goals
It is essential that while building your portfolio, you achieve a strategic mix of asset classes to ensure you have a dynamic portfolio catering to your risk tolerance, investment timeline, and your financial goals. When choosing from the list of asset classes and sub-asset classes, there are some key factors to keep in mind.
- Risk tolerance: What type of investor are you? Are you a thrill seeker who thrives on volatility with the possibility of higher returns? Or are you the armchair investor who is happy with conservative investments that offer stability?
- Investment Horizon: How long do you intend to spend? Are your goals short-term? These would be suited to more liquid, stable assets like bonds. If you are looking for something Long-term, then focusing on asset classes known for growth would be a good move. These would include equities or alternatives.
- Income vs Growth: Would you like to receive a monthly income as you can with dividends or bond yields, or are you aiming for capital appreciation over time?
- Economic conditions: Asset classes are influenced by so many factors, including inflation, interest rates, and geopolitical events, so by diversifying your portfolio, you are giving yourself a little cushioning for any unexpected downturns.
| Investor Type | Suggested Asset Mix | Description |
| Conservative | Bonds 60%, Equities 25%, Cash 10%, Alternatives 5% | Ideal for capital preservation due to low volatility. |
| Balanced | Equities 40%, Bonds 40%, Real Assets 10%, Alternatives 10% | Moderate growth with Risk management |
| Aggressive | Equities 70%, Alternatives 15%, Bonds 10%, cash 5% | High growth potential but higher risk |
| Shariah-Compliant | Sukuk 50%, Equities 30%, REITs 10%, Alternatives 10% | Aligned with Islamic finance principles. |
Your portfolio should change as you and the markets do, keeping it balanced to remain aligned with your goals.
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FAQ about Asset Classes and Portfolio Diversification.
What’s the biggest mistake new investors make with asset classes?
Putting all your eggs in one basket. Investing in only one category, like stocks, trying to chase high returns, can leave you vulnerable if the market dips. This is why it is so important to diversify across the full list of asset classes and sub-asset classes.
How often should I review or rebalance my portfolio?
It would be best to review every 6 to 12 months or if there has been a significant event in your life or a large market shift.
Are alternative investments too risky for beginners?
Not with platforms like Gamma Assets, which make alternatives like fractional real estate more accessible and manageable while offering fantastic guidance.
What’s the difference between a stock and a bond?
A bond is a loan that you give to a company or the government, they offer stability. A stock represents a piece of the company that you own. Stocks offer growth.
How does investing in Saudi Arabia differ from other markets?
Saudi Arabia, through Vision 2030, is offering unique opportunities to foreign investors. These include access to Shariah-compliant investments as well as liberalizing markets like Tadawul.
It is important to realize that you are not chasing trends but rather building a smart and resilient portfolio. When building a strategy, it is important to ensure that it is meeting your goals, your values, and your vision for the future. Having a good understanding of the asset classes and sub-classes is important as it allows a clearer idea of the dynamics between different asset classes. So, whether you are looking for growth, stability, or both, understanding the list of asset classes and sub-asset classes will help you find the right balance, allowing you to move forward with confidence.
