Individual investors once had few asset classes (or types of investments) to choose from: There were common stocks, fixed-income investments (including preferred shares) and cash such as Treasury bills or Canada Savings Bonds. You now have more asset classes to choose from.
You can, for instance, use REITs (or real estate investment trusts) to buy into office towers, apartments, hotels, commercial and industrial real estate. Keep in mind, too, that REITs avoid the higher income taxes that most income trusts have faced since the start of 2011. While residential real estate may now weaken, real estate in general could recover if loose monetary and fiscal policies are too effective and eventually lead to galloping inflation.
As another example, you can buy into venture capital funds that invest in private companies and receive tax credits for doing so. When the stock market is receptive to IPOs (or Initial Public Offerings), well-managed venture funds can profit handsomely. But today’s skittish financial markets make this a less propitious time to buy venture capital funds.
You have even more options. As yet another example, you can buy mutual funds and ETFs (or exchange-traded funds) with exposure to a variety of industries or countries.
One advantage of having so many asset classes to choose from is that it lets you diversify more widely. This can improve your returns and reduce your risk.
Mutual funds are usually well diversified. As a result, they can make sense for people who lack the money to diversify on their own. Even wealthier investors sometimes buy mutual funds for diversification. Let’s say you want to devote a small amount of money to a risky yet lucrative industry. You may lack the experience and cash to diversify adequately. With the right mutual fund, you can get an experienced professional manager and diversification. ETFs (Exchange-Traded Funds) often beat most funds. But regularly buying ETFs is less convenient.