Most financial advice focuses on buying and selling specific assets.
Which companies have the highest growth potential? Will cryptocurrencies boom again? Is the price of gold heading up or down?
This is a different type of article. And it might be more important than anything you’ve read about a specific stock, crypto, or precious metal.
Instead of focusing on a specific opportunity, I’m going to discuss eight asset classes and how they fit together in your overall portfolio.
With the right strategy, you can balance out your various assets in order to steadily grow your wealth while minimizing losses.
After all, our strategy at Mangrove Investor is long term. We don’t do high-risk day trading or margin trading. That’s why we recommend growing your wealth through a mix of assets.
Proper asset allocation is all about managing risk. You never want to go all-in on speculative investments such as stocks and cryptos.
Take real estate, for example. The housing market tends to go up even when the stock market is struggling.
For example, as of November 2022, the S&P 500 Index is down 20% since the start of the year. But the home price index is 30% higher than it was at the beginning of 2022.
Sure, an aggressive strategy can work great during bull markets and economic booms. But getting the timing wrong can seriously derail your retirement plans.
Case in point, we saw many investors buy into the tech rally near the end of 2021 hoping to make a quick buck.
But since the peak of the rally, the tech-heavy Nasdaq Composite Index is down over 30% as of November 2022.
And no one – not even the world’s greatest financial experts – can predict exactly what will happen.
Don’t forget that almost no one saw the 2007-2008 financial crisis coming. That colossal event wiped out millions of Americans’ retirement accounts.
So it’s a smart move to diversify your holdings across different asset classes.
In the long run, you’ll be glad you set your portfolio up to weather whatever the future throws at you.
Ready? Let’s get started. Here are the eight assets that every investor needs to consider owning…
The stock market is the first place many people turn to when they want to grow their wealth.
It’s easy to understand owning a piece of a company. And the stock market has historically grown 7% to 10% a year on average.
Many companies make investing in stocks easy by offering a 401(k) plan for employees. These programs automatically buy stocks with every paycheck.
Despite the various ups and downs over the years, stocks have been a reliable way to make money on a long-term basis.
Some stocks also have dividends. These are small payments you receive every quarter just for owning shares.
But investing in the stock market can be complicated since there are thousands of companies to choose from.
That’s why it’s important to follow the recommendations of a trusted financial adviser.
You can also simplify things by buying exchange-traded funds (ETFs).
These funds give you exposure to a variety of companies in a particular industry or country.
Just be aware that ETFs charge an expense fee, so your profits may be slightly smaller than you expect.
In any case, stocks are a crucial part of any portfolio. They should be 30% to 60% of your total assets.
As you get older, it makes sense to sell some of your shares and move into investments.
Bonds are an essential part of your portfolio because they’re a low-risk way to build wealth over time.
U.S. savings bonds are issued by the federal government, so they’re one of the safest investments available.
There are two types of savings bonds: EE bonds and I bonds.
- EE bonds earn a fixed rate of interest.
- I bonds adjust for inflation every six months.
I bonds have become more appealing lately as inflation remains high.
Both of these bonds earn interest for 30 years, although you can cash them out after five years without a penalty.
You can purchase bonds at TreasuryDirect.gov without paying any fees, though you need to have several forms of ID and your bank information ready.
There are also many bond ETFs you can buy, such as the SPDR Portfolio Long Term Treasury ETF (NYSE: SPTL).
SPTL’s top holdings are long-term U.S. bonds that expire between 2040 and 2052.
Funds like SPTL give you access to the bond market without any long-term commitment. Keep in mind, though, that these funds have an expense ratio.
And if you’re willing to take on additional risk, you can consider purchasing corporate or municipal bonds.
So how much of your portfolio should you invest in bonds? Conventional wisdom says as much as 40%. That’s because bonds are safe investments that will protect your wealth during market downturns.
But if you’re a younger investor, you have more time to build wealth and can pursue a more aggressive investing strategy. So bonds can be as little as 20% of your assets.
Ultimately, your ideal exposure to bonds depends on both your age and your willingness to take on risk.
Did you know that until July 2022, the U.S. National Home Price Index had gone up every single month for the past 10 years?
In fact, the housing market had been red hot for several years. From June 2020 to May 2022, home prices soared a whopping 40%.
So it can be a smart investment strategy to buy real estate and rent it out.
This benefits you in three ways:
- Fixed monthly income from rental properties.
- Steady price appreciation from rising real estate values.
- Gain equity every month from mortgage payments.
If you’re looking for a simpler way to gain exposure to real estate, check out real estate investment trusts or REITs.
A REIT is a company that owns and operates real estate such as offices, hotels, warehouses, or other types of buildings.
Many REITs are traded on the stock market, and you can buy and sell them just like any other stock.
Another option is to invest in the Real Estate Select Sector SPDR Fund (NYSE: XLRE).
This ETF holds a variety of real estate firms and REITs.
In total, the value of your real estate assets, including your own home, should account for 10% to 40% of your overall portfolio.
Those numbers may seem high. But it’s important to be able to count on tangible assets when the future is uncertain.
So owning real estate is a way to keep your portfolio healthy in both bear and bull markets.
Gold and silver have been a store of value for thousands of years. And they remain a popular investment today.
In addition, these assets have historically held their value during economic downturns. They also serve as an important hedge against inflation.
There are two primary ways to own precious metals: physically or through ETFs.
Many investors prefer buying coins, bars, or jewelry because they’re a tangible, physical form of wealth.
Unlike cash, precious metals aren’t controlled by a central bank. And they’re recognized around the globe as reliable financial assets.
Keep in mind that if you choose to own physical assets, it’s essential that you protect them. That means storing them in a secure home safe or in a safe deposit box at your bank.
Another option is to buy ETFs that track the price of precious metals.
These trusts are custodians of physical assets, and they charge a small fee for their services.
Two of the most popular precious metal ETFs are the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).
It’s up to you whether to buy physical assets or ETFs. But either way, precious metals should be 5% to 10% of your portfolio.
This asset class has only been around for a little more than a decade. But it’s already a popular investment, with the total market cap of all cryptos at around $1 trillion.
That said, cryptos are notoriously volatile. Over the past several years, the crypto markets have seen multiple rallies of 100% or more, as well as multiple crashes of 50% or more.
The speculative nature of cryptos can make them a lucrative investment. But you don’t want to rely on them too much.
Putting up to 5% of your portfolio into cryptos is reasonable. That way you can make some quick gains while weathering the uncertainty in the crypto markets.
If you’re interested in buying cryptos, the two largest are Bitcoin (BTC) and Ethereum (ETH).
You can purchase these coins and many others on crypto exchanges such as Coinbase, Binance.US, and Crypto.com. Or you can use services like PayPal or Robinhood.
Note that most companies charge a small fee whenever you use their platforms to buy or sell cryptos.
You may have seen recent headlines about paintings selling for millions of dollars. For instance, a piece of art by Andy Warhol sold for $195 million at an auction in May 2022.
But the ultrawealthy aren’t just art connoisseurs – they’re also smart investors.
Artwork tends to appreciate in value over time. And as an investment, it generally performs better than stocks during economic downturns.
But fine art isn’t the only asset for you to consider. Some other popular collectibles are coins, stamps, comic books, toys, memorabilia, and sneakers.
You never know what someone will be willing to pay for a rare item. For instance, an unopened Super Mario Bros. video game from 1985 sold for $2 million.
Some investors even trade bottles of wine. In fact, the wine market has its own index – the Liv-ex Fine Wine 1000.
Plus, in addition to being a source of revenue, collecting can be a fun hobby.
Just be careful not to depend too much on the collectibles markets, as they’re highly speculative. It can also be difficult to sell collectibles when you need to.
So the value of these assets shouldn’t be more than 5% of your overall portfolio.
Certificates of deposit (CDs)
Certificates of deposit, or CDs, are a risk-free way to make money on your cash savings.
You invest money with your bank for a period of time – anywhere from several months to several years – and earn interest at a fixed rate.
Unlike speculative investments such as stocks and cryptocurrencies, you can’t lose money with CDs. The federal government also insures them up to $250,000.
That said, CDs have fallen out of favor lately due to historically low interest rates.
As of the time of this writing, the highest-yielding CD offers only 4.25% – and that’s for a five-year term.
Plus, if you withdraw money from your CD before the term is over, you forfeit some or all of the interest you’ve earned.
Still, CDs are an option if you have extra cash you’re willing to set aside. And with a three-month, six-month, or one-year CD, you don’t need to make a long-term commitment.
You can also create a CD ladder by opening multiple CDs with different maturity dates. That gives you access to your cash sooner while still taking advantage of higher yields.
Overall, CDs aren’t a great choice when interest rates are low. But as rates rise, they become more worthwhile.
If the idea of a risk-free asset appeals to you, consider putting up to 5% of your portfolio into one or more CDs.
Cash may not seem like much of an asset. After all, with inflation at its highest level in decades, the U.S. dollar is losing value every day.
Plus, the average interest rate of a savings account is less than 0.2%. So you’re basically getting nothing by keeping your money at a bank.
But cash is actually one of the most important assets in your portfolio. That’s because you need it to buy all the other assets listed in this article.
For example, market downturns have historically been the best times to buy stocks – but only if you have the cash on hand to buy them.
When you have the opportunity to grab a great stock at a low price, you need to have cash ready for it. Those stocks could end up being your biggest winners.
On top of that, cash gives you flexibility if you have an emergency.
If you don’t have enough cash saved, you may need to sell your other assets at a loss in order to raise funds quickly.
That said, holding too much cash isn’t wise. You should put your savings toward investments that will grow in value.
A reasonable amount of cash savings is 5% to 10% of your portfolio.
If you have less than 5% saved, consider selling some of your assets. And if you have over 10% in cash, then you should look for investment opportunities.
Asset allocation is an essential part of your investment strategy. And it doesn’t need to be complicated.
Below is a basic overview of how you should approach various asset classes.
Note that your ideal plan will vary greatly depending on your individual situation and preferences.
Stocks: 30% to 60%.
Bonds: 20% to 40%.
Real estate: 10% to 40%.
Precious metals: 5% to 10%.
Cryptocurrencies: 0% to 5%.
Collectibles: 0% to 5%.
CDs: 0% to 5%.
Cash: 5% to 10%.
Keep in mind that asset allocation is an ongoing issue.
For example, if the stock market performs well, the value of your stocks will increase.
That may put you in a position where your stock holdings are a greater percentage of your portfolio than you would prefer.
So make sure to rebalance your portfolio occasionally by buying or selling assets.