Asset Allocation Basis Part 4: What Are My Other Investing Options?

After reviewing which kind of investments fall into the category of fixed income and looking at the stock market, as an investor, we may think that we have covered all the asset classes. However, there are what we can call “hybrid” products that are not necessarily classified as fixed income nor as equities. Over the years, investors can now improve their asset allocation by choosing from a new bunch of “other” investments.

Linked Notes

One of the most popular products on the market these days are linked notes. How do they work? It’s an investment solution where your capital is 100% guaranteed by a financial institution but the  yield at maturity is unknown. The linked note has a fixed term to maturity (usually 3, 5, 8 or 10 years) and the yield is determined by the “basket” of securities traded on the stock market. It can be either a portfolio of stocks, an index or it can also be actively managed by a portfolio manager. In any case, you benefit from the guarantee of capital and you improve your chances of increasing the yield since the stock market usually out performs traditional certificates of deposit over long periods of time.

So you can participate in the markets without taking any risk? This sounds like the best investment possible, right? Not exactly ;-). There are usually important management fees attached to linked notes and the yield is usually capped so that you won’t benefit from the full potential of the market.

Commodities

This is another very popular asset class. Commodities regroup all the resources that are being traded on the stock market. Among the most popular, you can speculate on the price of oil or gold. They are highly volatile and highly dependent of economic events. Instead of betting on the strengths of a company, you are better on the demand for a resource. If you are right, the price will rise significantly and you will make a lot of money. However, I suggest that young investors avoid trading commodities because of the high volatility. In the very same month, your investment can show +5% and -5% 2 weeks after…

Real Assets

According to me, real assets are a very interesting asset class. They include all companies managing or working on pipelines, bridges, highways, etc. Since the overall road structure needs to be renewed everywhere in North America, these companies may benefit from huge governmental contracts.

Real Estate and Land

You believe in real estate but don’t have enough cash down to run your own 4plex? You can now buy indices that follow the price fluctuation of real estate or land.

You know your asset classes, now what?

Knowing your asset classes is the very first step before investing. However, we are still far away from opening an investment account. In the upcoming post of this series, we will look at determining your investor profile and how you should do your asset allocation.