How do you classify your investments?

Nowadays many people have investments in one way or another. Stocks, properties, REITs, ETFs, mutual funds and bonds are the most popular choices. Of course there are some other "investments" like warrant, CBBC and option. Even bank saving could be considered as investment as well despite of the miserable return.

I don't know how other people classify their investments but I do it in my way according to the possibility of value appreciation (depreciation on the otherwise direction) and whether there is income generation by the investments. The classification falls into category 1, 2, 3 and 4 in the below matrix.

		Value Appreciation
		Yes	No
Income Generation	Yes	1	2
	No	3	4

Cat. 1 investment can generate income while possibly enjoys value appreciation (depreciation as well). This is the ideal class of investment. At certain time frame, rental properties and certain types of stocks are good examples.

Cat. 2 investment just earns income only but does not see value appreciation over times. Holding bonds till maturity falls exactly into this category.

Cat.3 investment is the opposite of Cat. 2 so no income is received during the investment period. All one hopes is the price hike followed by a sell off for profit. Most, if not all, growth stocks that pay out close to zero dividend are the examples.

Cat. 4 is basically not an investment because it neither generate income nor will it appreciate over times. Cash or saving bank account deposit match exactly this criteria.

So one may ask why classify the investments in the first place as long as they make money in one way or another. This is about the objectives of our investment. That is to say why we invest in the first place. The objective of investment largely associates with our life cycle. Understanding in what stage of life cycle one is in then he/she can develop an investment strategy to best meet his/her needs by holding the corresponding categories of investment items.

Of course these four categories are not mutually exclusive. One can hold all four at the same time but putting an appropriate percentage among them is important and adjusting the percentages along the life cycle is even more vital. So in the first place one must examine into what categories his/her investments fall into and check what percentages they are in. Holding an inappropriate category and particularly having too much could be harmful to one's financial well-being. Just imagine a 80 years old retiree holding 10% of Cat.4 but 90% in Cat. 3, ie., no income but hopefully price hike could be fatal in case of the market crash. On the other hand, a young person with majority of his/her assets in cash will not render him/her a fast track of wealth accumulation. Both of the scenarios are not desirable.

So classifying the investments is not the end but just the first step. The key point is to know what investments one is holding then to adjust the holding percentage in the four categories in the investment portfolio to achieve the optimal balance between cash income and value appreciation. Simply speaking, investments classification is the just means while the allocation of investments to achieve the goal of cash income and value appreciation is the end.