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What are Asset Class Returns?

Jim B.
Jim B.

Asset class returns are the returns gained by an individual by investing in a specific grouping of similar investment vehicles. Investors can break down asset classes in general groups like equities and bonds, or they can divide them based on market capitalization or specific industries. By studying asset class returns, investors can judge securities in a large group without having to research each individual security. The asset classes that reward investors with higher returns generally have more risk attached to them as well.

For an individual preparing to invest capital for the first time, it can be difficult to tell where to start. There are so many different types of securities available across the investment spectrum that it's practically impossible to track them all individually. As an alternative, some investors break down their potential assets into classes to narrow down the field of analysis and make choosing securities a much simpler process. These investors can gauge the specific asset class returns and use this information to help them proceed.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

One way to use asset class returns to analyze securities is by performing sector analysis. In sector analysis, the investor watches one specific portion of the market and sees how the securities within that portion perform. The idea behind this theory is that a sector of the market that is performing well as a whole will pull all of the securities within it in a positive direction. Knowing this makes choosing between individual securities less important to the overall investment process.

To study asset class returns, an investor has to decide how he is going to break up the market into different asset classes. One way is to split the market into general groups like equities, fixed-income securities like bonds, and money-market securities. An investor may want to break down assets by the size of their market share, such as large-cap, mid-cap, and small-cap stocks. Finally, an investor can study assets by looking at how an entire industry, for instance the technology sector, is performing.

Investors can then construct their portfolio based on what they want out of their asset class returns. It is generally recognized, for example, that stocks carry the potential for significant returns, although they also are relatively risky. By contrast, bonds are a safer asset class, but their returns are usually modest. Many savvy investors try to balance out the asset classes they possess to achieve potentially high returns while still minimizing risk.

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