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Managing Cash Flow: Four Categories of Assets

Four Categories of Assets

What should I do with my money? It’s a question that you’ll ask yourself at one point or another. You know that sticking it under a mattress won’t do you much good. But maybe you’re also unsure about how to maximize your savings. With a wide variety of investments to choose from, managing cash flow isn’t always easy. It’s also certainly not one size fits all. At the end of the day, your portfolio should be unique; it needs to reflect you. It should consider not only your financial situation, but also your lifestyle and long term goals.

Smart investors understand the importance of being strategic. This is why they work towards creating a well-diversified portfolio. By diversifying strategically, your wealth will be spread out in a manner that maximizes return and minimizes risk. Before choosing how you’ll diversify, it’s important to understand the different assets that can make up a portfolio.

What Are Asset Categories?

Asset categories refer to the different types of investments. While the investments within each group can vary, the characteristics they exhibit are similar in nature. When managing cash flow, financial advisors will consider different asset categories to help investors diversify their portfolio.

Managing Cash Flow with Four Main Categories of Assets

1. Paper Assets

Paper assets are quite often literal pieces of paper that define ownership of an asset. Some classic examples of types of paper assets include stocks, bonds, mutual funds and even cash. One of the benefits to investing in paper assets is that it’s very easy to get into. Today, basically anyone with a computer and internet access can purchase stocks. The tricky part is navigating the market and knowing what and when to buy and sell. While paper assets are very liquid (easy to sell), they are also more unpredictable (subject to market trends).

2. Real Assets

Real assets are tangible. They have value based on their substance and property. One of the most common types of real asset is real estate. Investing in real estate comes with many benefits, including a steady flow of income (rent – if you’re a landlord) and more control over your investment. However, as with any investment, real estate also comes with its own set of risks.

3. Business

Investing in a business is another category of asset to consider. When you invest in a business, your return is derived from the business’ income. Though this type of asset is more tangible than say a paper asset, it is also very much reliant on the profitability of the business.

4. Commodities

Investing in commodities means investing in raw materials such as oil, gas or natural resources. Similarly to the other asset categories, investing in commodities comes with its own unique set of pros and cons. As it is perhaps less common, investing in commodities may require some extra learning when you’re starting out. Newcomers to this type of asset may start by focusing on exchange-traded funds (ETFs).

When it comes to managing cash flow it’s good to have options. By spreading out your wealth among different assets, you can ensure a portfolio that works for you. To learn more about the different types of assets, your best bet is to contact a financial advisor. An experienced professional will help you go over your choices, and create a plan that you feel confident and comfortable with.

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Eric Roy, CFP
Eric Roy is a Certified Financial Planner and Cash Flow Specialist with over 15 years experience, renowned for his creative, innovative and competitive insurance and exempt market planning strategies.