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Understanding Asset Classes Is the Way to Wealth

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When you're a young man or a poor man, you don't see asset classes. You see your paycheck. You watch it fly away on rent, food, taxes and getting around.

But you do have an asset class. You have cash. Or you did until you paid your bills.

If you can get ahead of those bills, you meet new, different asset classes .

These include stocks, which offer a better return than a bank account but can drop quickly in value if you're not paying attention. Another asset class is real estate, a house or apartment, which is very expensive and hard to sell.

The stocks are "liquid" assets. They're easy to sell and can become liquid cash fast. Assets that take time and money to sell, like a house, are said to be "illiquid."

Liquidity

Of course, there are ways around that. That Rolex on your wrist, for instance. The pawn shop may give you half what it's worth, and then demand you pay the full value to get it back. In this case, you've basically just taken out a loan.

Loans are a separate asset class from stocks or real estate. When traders formed the New York Stock Exchange under a buttonwood tree in 1792 , they weren't there to buy shares of companies. They were there to trade loans in the form of U.S. government bonds.

When the government borrows money, or you take out a mortgage, you create a bond. You owe the money, over time, and pay interest. It's a liability.

The holder of your mortgage, or the owner of that government bond, now has an asset. They can trade it or borrow against it.

My first big story as a reporter, 40 years ago, was about bonds. A man owned a bond tied to housing. He borrowed against the bond, and with the money, he bought another housing bond. Then he got another loan. He was creating " leverage ," a pyramid of bonds, all aimed in the same market direction.

It didn't end well.

When looking at stocks to buy or sell, you look at their leverage. JPMorgan Chase (NYSE: JPM ) is said to have a " fortress balance sheet ." Bad news can pound against it all day. A retailer like Sears (NASDAQ: SHLD ) has loans on everything . It is said to be "highly leveraged."

Rating agencies examine loan portfolios and issue "ratings" on them. The higher the rating, the more likely borrowers are to be paid, and the less interest the borrower has to pay, and vice versa.

Moody's, the largest rating agency, does to governments and corporations what Equifax (NYSE: EQX ) does to you, deciding how much leverage you can get, and what you will have to pay to borrow money.

The Asset Classes to Invest In

Now you're an old man, like me. You have money and see there are many asset classes to put it in.

Cash is just one asset class. It's very liquid, but there's no return. Bonds or loans are another. They are less liquid and have a fixed return, but their value could rise or fall. Stocks are very liquid and actively traded but may carry even greater risk than bonds.

Then there are the "hard assets," like real estate, commodities like gold, or that Rolex you just bought back at a pawn shop. Hard assets are not very liquid, but their value is usually secure. For example, in the case of real estate, they're not making any more land.

The key to wealth is in your hands. Save cash and invest it early in liquid asset classes that make money. Pay careful attention, and as your pile grows, spread the wealth among different types of assets, creating your own fortress balance sheet.

Don't just work for your money. Get your money to work for you.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn . As of this writing, he owned no shares in companies mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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