I commented a while back on the fact that we need more asset classes when defining our asset allocations. A lot of people think that it’s enough just to divide your investments between stocks and bonds. I think the world has come a long way since the original research was done when those were the only two classes of investment.

I’d include the following asset classes in my allocation strategies:

  • US Stocks
  • US Bonds
  • International Stocks
  • Inetrnational Bonds
  • Real Estate or REITs
  • Commodities
  • Gold and Precious Metals
  • Timber
  • Cash

Incidentally, I don’t consider Timber a subset of commodities though you could make an argument for that (my argument is that Timber is the resource you invest in to create commodities: lumber, pulp, paper…). Likewise, I consider Gold/Precious Metals to be independent of commodities due to the way Gold does not react to normal supply/demand like commodities.

Besides these asset categories, I would recommend sub-categorizing as necessary. Within stocks you would have value and growth; large cap, mid-cap, and small cap. Within bonds you would have high-quality, inflation adjusted, stable value, and junk bonds.

On the topic of Timber, see the footnote on this page that describes how Timber returned 13.65% annually since 1961, outperforming the S&P 500, commercial real estate, international stocks, and bonds for both ten and twenty year periods. You can invest in timber easily by going for the big timber REITs RYN and PCL since there are few other public companies.

As for Gold… consider it insurance. If the financial system at large is facing significant turmoil, stocks and bonds can go down together. In that rare situation, Gold will do well. I’m actually a gold bull, so I have a rather high target for gold allocation in my investments, but that carries much more risk and effort than most people would want to consider.

A lot of people use Cash only for “safe money”. You should consider having cash on hand in addition to this to deal with investment realities… including taxes, rising interest rates, or even the occasional buying opportunity. In fact, cash or CDs may yield more than bond alternatives and should be compared for your allocation of high-quality bonds.

You can invest in commodities in several ways. DBC is good if you’re want an ETF. I’ve owned PCRDX in the past and it’s good for dollar cost averaging.

One final point is that having these asset classes in an asset allocation strategy does not mean you actually need to invest in them. Your allocation could very well be ZERO for a given category. For example, If you own your own house, you may not want to put much money in REITs. Or if your timeframe is short you may not want to invest in stocks…