Fundamentals of Capital Allocation – Major Asset Classes

1. Public Equities (Stocks)

Ownership shares of publicly traded companies listed on stock exchanges (e.g., S&P 500 companies). Shareholders benefit from price appreciation and dividends.

Pros

• High long-term return potential

• Highly liquid — can buy/sell quickly

• Easy to diversify across industries and countries

• Transparent pricing and regulation

Cons

• Volatile in the short term

• Market crashes can wipe out large portions temporarily

• Emotional investing can lead to bad timing (buy high/sell low)

• Exposed to economic cycles

2. Private Equity / Equity Stakes in Private Companies

Ownership in companies not traded on public markets — includes small business ownership, startups, private partnerships.

Pros

• Potential for very high returns

• Influence or control over operations • Lower price volatility than public markets (because pricing isn’t daily)

Cons

• Illiquid — hard to exit or sell quickly

• High failure risk, especially in startups

• Requires expertise, management, or due diligence

• Valuation uncertainty

3. Fixed Income (Bonds)

Loans made to governments or corporations in exchange for fixed interest payments, with principal returned at maturity.

Pros

• Predictable, steady income

• Lower volatility than stocks

• Used for capital preservation and income generation

• Often move differently than equities (good diversifier)

Cons

• Lower long-term returns than stocks • Vulnerable to inflation (fixed payments lose purchasing power)

• Interest rate movements can reduce market value

• Corporate bonds carry credit/default risk

4. Real Estate / Land

Ownership of physical property or land, used for rental income, appreciation, or development.

Pros

• Generates cash flow (rent)

• Tangible asset with intrinsic utility

• Historically strong inflation hedge

• Can use leverage (mortgages) to increase returns

Cons

• Illiquid — selling takes time

• Property management problems (tenants, repairs, vacancies)

• Upfront capital required

• Market downturns can trap equity for years

5. Commodities (Gold, Oil, Metals, Agriculture)

Raw physical resources used in production or held as stores of value.

Pros

• Hedge against inflation and currency depreciation

• Useful during geopolitical or market uncertainty

• Low correlation to stocks/bonds

Cons

• No cash flow — only price speculation

• Can be highly volatile

• Requires storage or futures contracts • Influenced by global supply/demand shocks

6. Crypto-assets (Bitcoin, Ethereum, etc.)

Digital assets secured by blockchain technology. Some are “store-of-value” assets (BTC), others enable smart contracts and applications (ETH).

Pros

• High upside potential in emerging tech

• Borderless, 24/7 markets

• Decentralized and independent of governments

• Can provide diversification from traditional finance

Cons

• Extremely volatile

• Regulatory uncertainty

• Security risks (exchanges, custody)

• Many crypto projects fail, fraud risk

7. Cash & Cash Equivalents (Savings, Money Markets, T-Bills)

Highly liquid, low-risk assets immediately convertible to cash.

Pros

• Safe and stable

• Useful for emergency reserves and short-term spending

• No volatility

• T-bills and money markets earn modest interest

Cons

• Very low returns

• Inflation erodes value over time

• Not a growth vehicle

• Poor long-term wealth builder