Although the investment world may seem really complicated at first glance, is a lot simpler than it seems. Although there are thousands of available mutual funds to invest in, most mutual funds fall within just a few fundamental categories. By way of analogy, although a supermarket carries thousands of items, a healthy diet requires consuming just the seven primary nutrient groups (proteins, carbohydrates, fats, vitamins, minerals, fiber, and water), which can be accomplished with a handful of foods and drinks. This short list then splinters into a few dozen nutritional subgroups and endless food choices, but you can do  fine nutritionally with a small menu of well-chosen items. Similarly, diversified portfolios require combining only a few primary investment groups which are known as asset classes: stocks, bonds, real estate, and commodities. Although sub-asset classes are abundant and beneath them there are many more fund options, only a few excellent selections are required for a diversified portfolio. Here’s a basic description of each major class, along with an explanation of its role in a portfolio and its primary subgroups.

Stocks

Buying a stock share makes you a part-owner of a business, entitled to any growth and dividends it produces. There are several subcategories, but any stock investment is made for its outstanding growth potential. However, being an owner comes with risks, and the downside of investing in stocks is their volatility and potential for massive losses (-50% or more!). Long-term investors, who can stomach the ups and downs, can benefit significantly from a heavy dose of this medicine.

Stock mutual funds may invest in the top few hundred companies in the US like Apple, Walmart, Google, and FedEx (a stock subcategory known as large caps), or the few thousand smaller US companies including Tesla, T-Mobile, and Burlington (small caps). Investors can diversify by also purchasing funds that buy stock in major international companies like Switzerland’s Nestle, South Korea’s Samsung, and England’s HSBC (foreign stocks), and may consider investing in up-and-coming countries’ firms like China’s Ten-cent and Brazil’s Vale (emerging market stocks). Investors can also buy broader-focused stock funds which cover a few of these bases at once.

Bonds

Unlike stocks, with bonds, you are a loaner, not an owner. Bonds are little pieces of loans made to government entities or companies, which must pay back the loan plus interest regardless of how well or poorly their situation is. Because bondholders are lenders, they don’t get to share in the growth of a company should it do well, nor are they expected to share in the losses should operations decline. Therefore, most bond investments tend to earn significantly less than stocks, but there is much less risk involved. The main job of bonds within a portfolio is protection —acting as a buffer to the stock market’s volatility— but bonds also get interest payments, producing guaranteed income.

Bonds’ subclasses, (investment-grade, high-yield, short-term, intermediate-term, and long-term) differ in various levels of potential risk versus reward entailed in owning them. Depending on how strong the borrower’s credit rating is and how long the term of the bond loan (with longer being riskier), the investor can accept various levels of risk in exchange for expected rewards. Also deserving mention are bond subcategories with potentially tax-free income (municipal bonds) and inflation-protection (TIPS). However, because the primary purpose of owning bonds is as a stabilizer, a healthy portfolio’s bonds are weighted toward those backed by the US Government.

Real estate

Another portfolio category designed for long-term investment growth is real estate. Heimishe investors may be surprised to learn that you don’t need a brother-in-law in the business to profitably invest in property. Specialized real-estate mutual funds called REITs buy, develop, and manage all forms of real estate. REITs’ share values grow as the value and number of their properties increase , and also provide ongoing income in the form of their properties’ rents. As with stocks, REIT investors have done exceptionally well, averaging more than 10% compounded annually over the decades, but with stock-like volatility. If an investor is prepared for the interim ups and down, real estate has a place in their portfolio.

Real estate subcategories include funds that specialize in apartments, shopping centers, offices, industrial properties, and every other conceivable type of real estate. However, as with stocks, there are REIT funds that diversify and own a piece of all real estate’s subcategories, so it’s never been easier to benefit from property ownership.

Commodities, maybe

This asset class, which may include gold, silver, oil, and other natural resources, is somewhat controversial. Many professional investors see no real value in owning these assets, arguing mainly that since they have no intrinsic earning potential for compounding (unlike stocks, real estate, and bonds), they are likely to track inflation after temporary spikes and collapses  in prices average out. There is an argument, though, that since the 1970’s, when the world left a system of gold-backed currency, there is a significant risk of a devastating paper-currency collapse, and holding hard assets is a protection in that scenario. James Grant, a widely respected economist and writer, is of that mind, and is a big fan of owning gold as a doomsday hedge, despite its dismal returns over the decades. However, those who have significant amounts of silver trinkets and gold jewelry probably own enough shiny metal to be yotzei this shittah anyway.

Putting it all together

Someone can eat all the food groups and still be eating very unhealthily by having too much/little of one food group, or selecting the junk food within each category (potato chips and pastrami come to mind). Also, food menus must be adjusted to specific needs based on age, allergies, etc. Similarly, a portfolio also can be lopsided, chock-full of junky options, or just inappropriate for the specific investor’s situation. Do your investment “shopping” carefully, or hire a pro to cook for you.