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off the table. When greed takes over it becomes very classes, such as real estate and private equity, may
difficult to sustain long term growth in portfolio. require significant investments to participate. On the
other hand, stocks and bonds can often be purchased
In summary, the choice of asset classes and investing with smaller amounts of capital.
strategy is a crucial part of building a successful investment
portfolio. Investors should carefully consider their investment Considering these additional factors can help investors
goals, risk tolerance, and time horizon when selecting create a more diversified portfolio and better manage risk.
investments and crafting their investing strategy. It is important to carefully consider all factors when choosing
assets to invest in, as well as to regularly review and adjust
Additional Factors in Classifying Assets a portfolio as market conditions and investment goals
change over time.
Here are additional factors that may be considered when
categorizing assets:
Liquidity: Liquidity refers to how easily an asset can be Asset Classes and Diversification
bought or sold without significantly affecting its price. Diversification
Assets that can be quickly bought or sold without a Smart, disciplined, and regular investment is the best way
significant price impact are considered more liquid. Cash to allow one's money to mature. The key to intelligent
and highly traded stocks are typically highly liquid assets, investing is diversification. A diversified portfolio minimises
while private equity investments and real estate may risks while investing for the long-term. It allows for a certain
be less liquid. amount of high-return investments by offsetting possible
Associated Risk: Risk is the likelihood that an investment risks through more stable alternatives. A diversified portfolio
will lose value. Generally, assets with higher risk have helps one's overall investments to absorb the shocks of any
the potential for higher returns. Stocks, especially those financial disruption, providing the best balance for one's
of smaller companies, are generally considered riskier saving plan. But diversification is not limited to just the type
than bonds or cash. of investment or classes of securities; it also extends within
each class of security. Diversification is a strategy used by
Volatility: It is the degree to which an asset's price
investors to reduce risk by allocating their investment
fluctuates over time. Assets with high volatility
portfolio across different asset classes. Diversification helps
experience larger price swings, while assets with low
volatility tend to be more stable. Stocks and reduce risk because different asset classes tend to perform
differently under various market conditions.
commodities are often more volatile than bonds or
cash.
Diversification is important because different asset classes
Investment Size: It refers to the minimum amount perform differently under different market conditions. For
required to invest in a particular asset. Some asset example, during a recession, stocks may perform poorly,
while bonds and real estate may perform better. By
diversifying across asset classes, you can reduce the risk of
losing money in any one area and increase your chances of
achieving your long-term investment goals.

Moreover, diversification can also help you to achieve a
balance between risk and return. Different asset classes
have different levels of risk and return, so by investing in a
mix of asset classes, you can create a portfolio that aligns
with your risk tolerance and investment objectives.

Overall, asset classes and diversification are important
concepts to understand when investing. By diversifying your

34 | 2024 | JULY | BANKING FINANCE