Stocks, Bonds, Cash and Beyond: The Main Asset Classes

You have $200 for a bill due at year-end. Your investing screen offers a stock fund, a government-bond fund and cash. Does the word "government" mean your money cannot fall in value?

A stock is part ownership in a business. A bond is a loan with stated repayment terms. Cash is money available to spend.

In 2022, one US government-bond series lost almost as much as the stock series beside it. Dependable repayment and a steady price are two different things.

Three claims with different jobs

An asset class groups investments with similar economic features. Stocks, bonds and cash are three common groups. Knowing how much loss your goal can bear helps you choose among them.

Cash equivalents are short-term investments grouped with cash for investing purposes. One example is a Treasury bill: US government debt repaid within a year. A bill is still a loan; its short life is what puts it close to cash. The grouping emphasizes access and dollar stability.

A fund pools investors' money to hold investments; an account holds cash or investments, including funds. Two funds can sit in the same account and expose you to very different risks. A stock fund owns business stakes, while a bond fund owns loans. The account label does not change those claims.

These groups are a starting point, not a complete risk rating. A bond from a struggling business and one from a reliable government both belong to the bond class. The borrower's ability to pay still matters.

A repayment promise is not a fixed price

In Aswath Damodaran's US return history, the 2022 stock series fell 18.04% and the 10-year Treasury series fell 17.83%. The stock series tracks the S&P 500 and includes dividends, cash paid to shareholders. Both figures are total returns: price changes plus income.

For three-month Treasury bills, the dataset uses the year's average rate, 2.09%, to approximate a return. These are historical comparisons, not the returns of the products on your screen or a bank deposit offer.

Start each comparison with $200. Returns are nominal, meaning before inflation. The two long bars leave almost the same hole in your budget.

Each dollar amount comes from one multiplication:

For stocks, $200 × (1 − 0.1804) = $163.92. The same calculation gives $164.34 for Treasuries and $204.18 for bills.

Which result covers your fixed $200 expense at year-end? Only the Treasury-bill comparison leaves enough. The other two leave you about $36 short. Your bill does not shrink because your investment did.

The same government stands behind both Treasury series. But a reliable borrower's promise to repay does not fix what someone else will pay for a long-term bond. If you need to sell early, you depend on that market price. A bond can lose value without its borrower missing a payment.

Match the feature to the money's job

The 2022 winner does not settle the next decision. The useful question is which feature fits the money's job.

Money needed soon puts access and dollar stability first. Cash and short-term investments can serve that purpose. Some pay interest, but the income may lag rising prices: keeping the same number of dollars can still mean losing purchasing power.

Bonds offer agreed payment terms for future needs. The borrower's reliability and the repayment date matter, especially if you might need to sell earlier. A bond fund has its own changing share price; the payment dates belong to the bonds it holds.

Stocks give you a stake in business growth. Their payoff depends on business results, payouts and the prices buyers will pay. That can serve a distant goal with room to absorb losses, but ownership comes with no promised growth rate.

In the US, eligible deposits at FDIC-insured banks have deposit insurance within coverage limits. Stocks, bonds and money market funds do not. A money market fund holds short-term investments; a bank deposit is money owed to you by the bank. That distinction matters when comparing cash and money market funds.

For the $200 bill, an insured savings deposit you can withdraw in time meets the need for accessible dollars. Its longer-term weakness is inflation. If the screen only says "cash," the missing details are where that money goes and when you can withdraw it.

Optional: the longer record

Compounding the 97 annual observations from 1928–2024 in the same dataset gives nominal annualized returns of about 9.9% for stocks, 4.5% for 10-year Treasuries and 3.4% for bills. Annualized means the steady yearly rate that would produce the same full-period growth.

A good long record still contains bad years. The stock series leads over this US sample, but that does not tell you next year's winner or how soon a loss will recover.

Property, commodities and crypto

The same question works beyond stocks, bonds and cash: what do you actually own?

• Property can earn rent, but repairs cost money and selling takes time and expense. REITs, real estate investment trusts, own or operate income-producing property or related assets. Exchange-traded REIT shares still have market prices that can fall.
• Commodities are goods such as oil and gold. Holding a physical good, a contract tied to its price or shares in its producer gives you different risks. A gold miner has a business to run; a gold bar does not.
• Crypto includes assets such as Bitcoin. Owning Bitcoin gives you no claim on a company's earnings, and its price can swing sharply. An asset can have a market price without producing business income.

Start with the ownership side of this map: the next lesson follows three shares of Harbor Coffee to show what a stock gives you.

In short

• Stocks offer ownership, bonds offer agreed payments, and cash emphasizes access. Match the claim to the job.
• Cash can keep its dollar value while losing buying power.
• A government bond's resale price can fall while its payment promise remains intact.
• A strong historical return cannot tell you whether next year's bill will be covered.
• A stock fund is a way to own stocks. Putting it in an account does not change what it owns.