When people think about investing, there are only 4 asset classes that encompass the entire spectrum of what one person can invest in. The 4 asset classes are Paper, Commodities, Real Estate, and Businesses. Within these 4 broad asset classes, there are subsets that make up the lengthy list of what is available to put your money to work. A consensus is to find which asset class speaks to you the most and what one you find interesting. Then you should branch out to help diversify your wealth across all of the asset classes for a more sustainable financial freedom future. Let us review further into understanding each asset class.

Paper

Paper is the most utilized and understood (thought to be) asset class in the world. Paper is an extensively broad asset class that goes deeper than most would be able to understand through the world of derivatives. Here is a list of the paper assets that are available for investments and a further understanding of each:

Fiat Money/Currency: This is the physical coins and paper that people get paid in. The Wikipedia definition defines as “Fiat money is a currency established as money, often by government regulation. Fiat money does not have intrinsic value and does not have use value. It has value only because a government maintains its value, or because parties engaging in exchange agree on its value.” Examples include the United States Dollar, Chinese Yuan, Japanese Yen, European Euro, British Pound, Australian Dollar, Canadian Dollar, Indian Rupee, Mexican Peso, Turkish Lira, along with some others. Today, currencies are debt, or I.O.U.s that are constantly losing value through inflation.

Stock/Bond: This is when you buy ownership of a business or company, which can also be known as a security. An important difference would be whether you have an investment in a private company (equity) or a public company (stock is equity/bond is debt). Equity is the amount of shares/ownership you have within the company, which can be in a private or public company. A bond is when a public company takes out a loan and the public company becomes a borrower of currency through an investor.

Mutual Funds/Index Funds/ETFs: These are simply a combination of different stocks and/or bonds that represent a certain index, sector of the market, or other assets. These can be self-managed or professionally managed. Examples include the S&P 500 Index/ETF, which tracks the performance of the top 500 U.S. companies. Another example could be a mutual fund that is geared to perform on a philosophical model on a predetermined date of when you would want to retire from a job or career.

All the above types of Paper assets are derived from some or all the other asset classes (further understood in the 1st episode of Mike Maloney’s Hidden Secrets of Money Series: Currency vs. Money). Essentially, the Paper asset class gains it value based on the underlying asset it is comprised of, i.e., the United States Dollar use to be backed by gold through the Gold Standard, stocks/bonds are backed by the underlying business through either the equity or debt of that business. Other than that, Paper assets are simply that, paper or more understood in today’s world, digits on a computer or phone screen. There is no tangible asset in this class. Another major component of the Paper asset class is that you have the least control of the asset; these assets are dependent on the underlying asset. An example is the stock/business owner’s decisions on running the underlying business stock/bond you are invested in effects the balance sheet of the company and ultimately the profitability of how your stock/bond performs.

Pros:

• Liquidity/convert in and out of cash
• Diversification
• Relatively passive after initial research on specific stock/bond to invest in

Cons:

• Market volatility can result in significant losses
• Lack of control; cannot control what happens in the market and its effect on stock/bond
• Correlated to interest rate effects
• Extensive research and fundamental/technical analysis (discussed on another article linked here)

Commodities

Commodities are natural or energy sources and raw materials from the Earth that are used in the world that has economic value. These are the basic needs that create everything else. There are varying degrees of classifications of commodities, such as raw, hard, soft commodities; agricultural vs energy vs metals; etc. I am going to give you a list of different commodities that I track and know of, and I think that will give you a better understanding of what incorporates a commodity.

Use vs Precious Metals (Hard): Use metals are those that are used in industry to create goods, such as copper, lead, aluminum, nickel, etc. These typically have less economic or intrinsic value.
Precious metals are considered gold, silver, platinum, and palladium. These metals have industrial use but are mostly considered to have economic and intrinsic value.

 Energy Sources (Raw/Soft): This subset group includes oil, natural gas, uranium. This could also include any type of lumber that is used for either industrial use or energy.

Agricultural (Raw/Soft): This includes food and water sources; with examples of livestock, grains, sugar, milk, corn, wheat, cocoa, coffee, etc.

Commodities are what are used to build the world as we know it today. People can invest in commodities in many ways which can be in combination of futures contracts (combination of Paper/Commodities asset classes), actual physical metals, energy sources, or agricultural goods. A problem with having some types of commodities, such as energy and agricultural goods, is storage, safety measures, shelf lives, etc. This is where the Business/Commodities asset classes combine to overcome better properly some of those issues of an individual investor in commodities.

The most known personal investable commodity is use and precious metals. Although still presenting with some of the issues above of the other commodities, use and precious metals are favored. Gold and silver are the most notable precious metals that people invest in.

With commodities to a degree, if the commodity you hold physically is in your own possession, the increase amount of control you have of it. Aside from having the physical commodity in your possession, other natural aspects will either decay or erode that commodity over time which may decrease the control you have of that physical commodity. Another component of commodities in regard to control is the decrease of economic control with increased reliance and use cases from government, politics, and the global economy. Hence, commodities is very dependent on the fundamental values of economics through supply and demand.

Cryptocurrency: Cryptocurrencies, also can be referred to as crypto, is “digital assets designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.” This includes Bitcoin and altcoins, which is the vast amount of all the other types of cryptocurrencies other than Bitcoin.

Diving over the deep end learning about cryptocurrencies, one can argue which ones are valuable vs unvaluable. Through lessons I have learned from other experts, I have begun to call all cryptocurrencies crypto because most in today’s ecosystem are not necessarily currencies.

To some, crypto is a Commodity, some another form of Paper, while others identify it new asset class. As for keeping it within the scope of the 4 main asset classes, I believe in it as a new subset of a commodity.

Pros:

• Effective hedge against inflation; not a derivative since the commodity is the good itself (no counterparty risk once held in possess or ownership)
• Portfolio diversification
• High liquidity; easily transferred back into cash

Cons:

• Price volatility can lead to significant losses
• No income generation (unless leased or utilized)
• Storage and transportation costs for physical commodities
• Limited control over the underlying asset; effected by supply and demand

Real Estate

Real Estate is a piece of property that includes the physical land and buildings on it; along with which can include any other commodities or natural resources. In general, real estate can be invested in a variety of ways, but in general, there are 4 subsets.

Land: Simply the piece of property on Earth which includes the natural resources on or in that part of property. Land can be diverse and can be used for any of the below subcategories of real estate.

Industrial: Property used to develop or manufacture goods as a business. This includes factories, warehouses, and storage or distribution centers.

Commercial: Property used to provide the public goods or services through a business. Commercial real estate is owned by one person and is then either used by the owner’s business or rented out to another business in use to provide goods and services.

Residential: This is property that is used living. Examples are homes, rental properties, apartments, townhouses, etc.

Online/Internet: Like crypto, this is a new form of real estate that has property rights on the Internet. This can include one’s intellectual property in the form of videos, websites, domain names, and/or any work/invention/knowledge. Another form of this is some cryptos that have digital landscapes for virtual reality, but this is something I still am learning about.

Just as the other assets can be in combination, real estate can be a business (rental properties, buy and flip, farming) or real estate can be in conjunction with stocks, such as REITs. Real estate as a general owner in all forms of subsets allows for greater control than paper and commodities. There still are counterparty risks that can affect the real estate. Government regulations/taxes or if there is too much leverage used from either private or banks are some examples of this.

Pros:

• Steady cash flow through rental income
• Potential for property appreciation over time
• Tax benefits/depreciation
• Amortization (pay the loan/debt back with cheaper dollars; the true definition is the action or process of gradually writing/paying off the initial cost of an asset)

Cons:

• High upfront costs for purchasing property
• Ongoing maintenance and property management responsibilities
• Market volatility can impact property values
• Limited liquidity compared to other investments

Business

Business is the asset class that gives you the most control out of all the assets. Business is when you make, buy, and/or sell goods and/or services in exchange for making a profit.

One can start, invest, or buy a business. Generally, starting a business can start as someone’s hobby or “side hustle” and then is scaled up to a company. There are different types of business entities that can be starte;, sole proprietorship, partnership, corporation, or limited liability. There are some subsets of those, but we’ll refrain from going deeper here.

The great news about business is it can be built on any skill or trade that you are good at and have a competitive edge to any competition or that you enjoy. Business can be in combination with the other asset classes in varying degrees.

A list of some pros and cons include:

Pros:

• Potential for significant long-term returns
• Control and influence on your time
• Tax advantaged
• Opportunity to earn dividends and participate in company growth; i.e. equity

Cons:

• Initial startup (sweat equity or capital)
• Risk of business failure
• Time and effort required to manage and grow the business
• Limited liquidity

Conclusion

These are the 4 asset classes that are available to invest in. Each of the asset classes can be as basic as investing solely into a stock or bond, buying physical commodities such as a piece of gold or silver, buying and renting real estate, or starting a brick-and-mortar commercial business to sell a good or service. Each of these asset classes can be blended in combination of one another.

It is your responsibility through trial and error and making plenty of reasonable mistakes (that you learn from) to pick which asset class, or all of them to varying degrees, makes most sense to you to invest in.

I would recommend starting with 1 asset class, and then branching into another asset class. Take action and invest in 1, learn and adapt, and then expand once you feel comfortable and have explored all the subsets of that 1 asset class; or simply stick to that 1 asset class and diversify yourself within that class.

From Rich Dad Company, most wealthy individuals diversify their wealth across all asset classes. To determine the appropriate percentage amount in each is for another article on asset allocation.

To the New World and the New You, much success in finding your financial freedom.