Blog | Personal Finance

Which Asset Class is Right For You?

Millionaires average seven different sources of income. Get the facts so you can choose which asset class is right for you.

play cashflow now

There are five choices on your path to financial freedom

Whether you’ve already set out on your path toward financial freedom or are just beginning to make a plan to get there, you have five main asset classes to choose from. Each asset class has pros and cons and requires different levels of time, effort and education.

But here’s a hint: You’ll want to learn about and invest in more than one. Why? Because diversification is the name of the game, and that means investing in more than just one asset class. We’ll talk more about the importance of diversification shortly.

What are the top four asset classes?

There are numerous ways to invest and build wealth. And once you increase your financial education, you’ll have a better understanding of the best investments for you. But to help you get started, here are some of the most popular asset classes:

  1. Paper Assets. Paper assets include stocks, bonds, mutual funds, and retirement accounts where you can invest in stock options, stock futures and foreign exchange. Paper assets also include real estate investment trusts, or REITs, and exchange-traded funds (ETFs).

    Whether you are investing for capital gains or for cash flow via stock dividends, there are many paper assets from which to choose. That’s why most people invest in paper assets, or the stock market — these are the easiest assets to get in and out of. And even though your financial planner or advisor may tell you that your retirement funds or 401K investments are diversified, they really aren’t. You still need to diversify amongst the various asset classes.

  2. Commodities. Commodities include metals (gold, silver, copper, etc.) food (grains, corn, coffee, and sugar) and raw materials (oil, gas, cotton, etc.). Commodities are generally a capital gains (or loss) investment, and you can buy future contracts of any commodity through the future exchanges. If you are a new investor, start small and build your financial education.

    For example, start by purchasing a single silver coin and then watch its value increase or decrease in your daily news. Your financial IQ will go up exponentially by having a little skin in the game and paying attention to what happens to that coin.

    I would be remiss if I didn’t mention the relative newcomer to this asset class: Cryptocurrency. You may already be familiar with the term Bitcoin, which is one type of virtual currency (or cryptocurrency). Today, as I write this article, one Bitcoin equals $9,153.99 — thankfully you can also start small here by buying a fraction of a Bitcoin instead of committing to a whole one.

  3. Business. This is an asset that people have become more aware of thanks to television shows like “The Apprentice” and “Shark Tank.” Within this class, there are two routes to take: 1) invest in your own business or 2) invest in someone else’s private business or company. The whole point is to generate a return back to you, the business and your investors and/or lender.

    Just be sure to do your due diligence and analyze the project, the partners, the financing, and the business and management team before making a business investment — these are the things a lender or investor really wants.

  4. Cryptocurrencies. Cryptocurrencies like Bitcoin, Ethereum, and Litecoin are the new assets on the block(chain). Rich dad considers cryptocurrency to be the People’s money because it’s created by and for the people separate from any government entity. And unlike other forms of digital currency like credit cards and wire transfers, cryptocurrencies are impossible to steal or counterfeit.

    Though they trade similar to paper assets, crytocurrencies have more in common with traditional forms of money because they are a means of exchange, they store wealth, provide a unit of account, are divisible and transferable.

  5. Real Estate. Ok, I’ve saved my favorite asset class for last. I invest primarily in real estate because it fits my formula for financial freedom. Real estate investments either provide cash-flow from rental properties (the overage you make each month from rent once all your costs are paid) or capital gains (a one-time profit from buying and selling a property). With real estate, you use leverage, or the ability to use other people’s money (OPM) to purchase the asset. As I talk about in It’s Rising Time!, “A property that is highly leveraged means there is a lot of debt on the property compared to the equity, or current market value minus the debt. The higher the debt on the property, the lower the cash flow. The lower the debt, the higher the cash flow.”

    Trust me, you’ll want to learn how to invest using other people’s money. And here’s an interesting tidbit you may not know: You can use cryptocurrency to purchase real estate!

Which asset classes will give you financial freedom?

When it comes to choosing investments for your financial freedom, it’s a personal choice that depends on your specific goals in life — and your interest, too. If you absolutely have no interest in the price of gold or think bonds are boring, then you won’t enjoy the day-to-day work associated with learning about and managing those asset classes. Although it’s smart to primarily invest in the things you’re most passionate about, so that you stay motivated, as we discussed earlier, it’s also important to be diversified.

When most financial planners and advisers tell you to have a diversified portfolio, they are usually referring just to your stock portfolio. Diversification to them means investing across the various stock sectors, such as large cap, small cap, blended, blue chip, high tech, or alternative energy.

But here’s a little hint: To truly be diversified means to diversify beyond paper assets, across all asset classes.

It is important to be invested in more than one asset class

Want to take a guess as to how many asset classes Robert and I are currently invested in? Yep, all four. Each asset class reacts to the markets differently, and each asset within each class may respond differently as well. Time and time again, we’ve witness how putting all your money in one basket may not reward you with the financial security you desire.

So it’s wise to get comfortable with each asset class (or at least two of them) and become a well-rounded investor.

And while it might be overwhelming at first, start small. Follow the Triple-A Triangle™ — Aspire, Acquire and Apply. Set your goals, research and increase your financial education and then take action. Many women (including me) have changed their life for the better by investing in assets, and you can too.

What one step are you going to take today on your journey to financial freedom?

If you’d like some help pinpointing your next step, here are my suggestions:

  1. To get more information and inspiration from others as you start your journey to financial freedom, check out Rich Dad investing classes.

  2. Explore working with a personal finance coach on such topics as real estate, stock trading and personal finance.

  3. Stop making excuses and learn how to get started in real estate by first debunking the myths that are holding you back and then creating a plan to move forward.

  4. Learn more about Bitcoin and other cryptocurrencies from crypto expert Jeff Wang.

  5. Discover everything that falls under the “commodities” umbrella, including silver, gold, oil and gas — and which are the easiest to start with.

Commit to taking just one action today, and then another tomorrow. Once you gain more knowledge and some momentum, you’ll find the asset classes that are perfect for you.

Original publish date: May 09, 2013

Recent Posts

The Rate Rise Era and the Dragon

The Rate Rise Era and the Dragon

As we enter a Bear market, we must understand the Dragon.

Read the full post
8 Advantages That Make Women Great Investors

8 Advantages That Make Women Great Investors

When it comes to the profession of investing, some people might automatically assume that it falls under the male’s domain.

Read the full post
7 Reasons to Use Create Cash Flow With the Stock Market
Paper Assets

7 Reasons to Use Create Cash Flow With the Stock Market

Here at Rich Dad, we focus on understand the difference between cash flow and capital gains. Why?

Read the full post