The 3 Types of Asset Classes (& Why Investors Like Warren Buffett Don’t Put Their Money in Just One)


Most people feel that being diversified in their investments is the intelligent thing to do. But, as Sharon L. Lechter (Rich Dad Poor Dad co-author and CPA) describes the various asset classes to invest in, she says, “Many people think they are diversifying, but all their money is in mutual funds.” What she’s really pointing out is that you’re not really diversified if you’re only in one asset class.

So, let’s look at the different asset classes and some of their pros and cons.

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The 3 Types of Asset Classes: Pros & Cons

1. Businesses

Pro: This is the asset class that offers the highest of all returns on investments, especially if you invest in a start-up that really takes off, like Instagram or Microsoft did. Also, if you really think about it, many tax laws were written to favor business owners, and many everyday expenses can be run through a business. For me, my business is PPR.

Con: Businesses are the toughest asset class to own, develop, and maintain.

2. Real Estate

Pro: Real estate is the easiest of asset classes to leverage. It’s easier to borrow money for real estate than it is for a business or paper assets.

Con: For the smaller investor, real estate can be far more capital intensive than investing in paper assets. (I can invest $25 in Lending Club, a paper asset in the form of an unsecured note, but it’s hard to invest $25 in a piece of real estate.)

Related: Why Warren Buffett’s Stock Picking Methodology is Outdated (& Real Estate is the Best Investment)

3. Paper Assets

Pro: Paper assets are the easiest of all asset classes to get in and out of. An example for me is that I can sell a note in less than 30 minutes. I’m not so sure I could sell a piece of real estate that quickly. I could also trade a stock option in seconds or minutes.

Con: You probably have the least financial control. There are definitely fewer tax advantages, and they can be highly volatile.

As you and I think about our investment plans for the upcoming year and any new tax implications, instead of just thinking about diversifying within one asset class, let’s think about what kind of synergy we can create amongst the asset classes we decide to invest in.

According to Robert Kiyosaki, author of Rich Dad Poor Dad, the average investors invest in a particular asset class, but the folks who get the best returns invest in multiple classes simultaneously (see “Who Took My Money”).

For example, Donald Trump created synergy between business and real estate. Warren Buffett, on the other hand, created it between business and paper assets. I intend to continue to do so between business and paper assets as well.

So, the first questions to think about are what kind of investor are you, and then what type of asset classes do you want to consider: businesses, real estate, or paper assets?

While you’re figuring out what type of investor you are, it may help to determine if you are risk-averse, if you are investing for the long haul, or if you are interested solely in cash flow. Some high income earners who aren’t necessarily concerned with cash flow may be looking for high-end rentals that will appreciate and be worth more later on. For others, they may be looking for both cash flow and appreciation. In a perfect world, everyone wants a little bit of both.

Related: Why You Should Start Thinking About HOW You Earn Money (Not Just How Much You Earn)

And let’s look at how much time commitment you’re willing to devote because we all know that “time is money.”

But, before answering the second question of what to invest in, you may need to take into account a quick overview of the current market. For this, I’ve always liked John Mauldin from

For me, although I personally invest in all three asset classes, I’m looking into making some adjustments to my portfolio. For example, I’m transitioning from ARMs (Adjustable Rate Mortgages) to fixed-rate mortgages, either by refinancing or selling off a few properties. In the new year, one of my goals is also to build my portfolio of performing notes to the point that the passive income from those assets is the same or higher than my current earned income. Overall, I just want to keep reinvesting my capital and keep the money moving.

So, how do you plan to create synergy with your investments this year?

Let me know your thoughts with a comment.

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.


  1. I am starting a business, I am putting out the smoldering ruins of my failed real estate empire (yeah, I screwed up hardcore — but I didn’t die. Yay…), and I still have a small amount put into paper assets outside of my savings accounts. I also have three jobs, a side business writing for clients, and the lowest expenses I could. Frankly, I’ve done everything wrong in life while convincing myself I was doing right, and if I weren’t such a coward I would’ve ended it all a long time ago. But hopefully you can succeed. 🙂

  2. Douglas Skipworth

    Great article, Dave!

    For the past 15 years, I’ve been focused on my business endeavors and my real estate investments. I look forward to the day when I can build the paper asset side of my portfolio.

    Most real estate investors I know (who use financing) are “house rich” but “cash poor,” which prevents them from allocating much to paper assets. I’ve definitely been in that boat as I’ve been paying down debt and reinvesting in the businesses and real estate. Thankfully, I’m investing for the long haul like you described so I know I’ll eventually be able to balance the three-legged asset stool!

  3. you forgot cash dave- how about we hold a portion in liquid assets? I always borrow against my CD’s for a real estate purchase and use the rent to pay down the loan…..2% is what the bank charges for a secured loan and the worst case that will happen is ill have to cash my own CD in to pay my own loan….42 properties later it hasn’t happened yet. Businesses give you your best return, followed by low income properties, here in Texas you have to be very fast- but you can get habitable homes for 25K and rent immediately for 400 a month for an almost 20% return before taxes and repairs- make it a triple net where the Tenant does minor repairs and your doing well……

    • Dave Van Horn

      Hi Dave,

      I like the leverage here in theory, but in my opinion I think there’s a loss of opportunity cost here mainly because of the low return with CD’s. I liked CD’s as an investment when they first became popular (offering returns close to 20%) but now they seem to be 2%-3% across the board. So in my mind, after inflation and taxes, I don’t see much profit compared to other investments.

      Other than being convenient and safe, I think a very similar strategy could be employed using higher yield investments such as: insurance contracts (which in my opinion are safer than banks), private money, and notes. Each of these require a bit of a learning curve but are definitely doable and fairly liquid.

      Liquid assets are different for everybody, I just wanted to point out a few more ways for you to make more money with your capital.


      • Dave I only keep money in the CD for the shortest time [possible while looking for great deals…..question: if I kept my money in insurance contracts am I instantly liquid? for example…I see a 4 plex for 50 k- how long does it take for me to get out of the insurance contract to buy the 4-plex? The CD can be borrowed against in 4 hours- with a cashiers check check ready- I think you are referring to long term returns no? I get 20% average return from low income real estate- I use 30 plus properties to pay off the CD secured loan usually in 6 months or less and im shopping again :>

        • Dave Van Horn

          Hi Dave,

          You’re right, it’s not as instant as 4 hours. It varies depending on the insurance company but from my experience I’ve been told to allow for up to 10 days to receive my money, but it’s typically quicker than that. I usually receive the capital within at most, a couple of days (no application, no questions ask). So I’m not sure how fast you have to move on these RE deals, but in my mind, the fastest you can get title insurance is at best just under two weeks. So anything liquid within that time period makes sense to me.

          Insurance contracts are also a very safe bucket that passes favorably to heirs. Insurance acts as a form of protection for your capital, so if you were involved in a lawsuit for example, a person can’t sue you and come after what’s in your insurance policy in most states. That’s much different than if someone were to sue you and they then could gain access to your capital tied up in any bank account or the equity in a paid off property. Also interest that builds inside your policy is income tax free.

          In general, I find insurance companies safer than banks because insurance companies rarely fail (and when they do, they’re almost always taken over by another company), they don’t borrow from the federal reserve (so their set asides are often dollar for dollar), and there life and health insurance guarantee associations with each state protects policy holders and beneficiaries from any insolvent insurance company (up to certain limits).


        • Nice! I was not aware of the lawsuit protection- While we are LLC’d up with liability policies, its still a worry. ( I require quarterly inspections of all my rentals and have for years- smoke detectors, door locks etc) I will be verifying Texas position on this ( lawsuit protection) and I think depending on the rates of return ill consider Insurance backed investing small scale / long term!! – any favorite companies you have? and what’s an average return for investors?
          Again thanks for your input-

        • Dave Van Horn

          Hi Dave,

          There’s no such thing as an average return because it all depends on the policy. But you should be seeing at least a 4% to 7% return (plus sometimes a death benefit).

          Most insurance companies will have a featured product that’s worthwhile, so there’s usually no one size fits all company I could recommend. It all depends which insurance policy you’re looking to invest in (there’s over 30 types of policies) and what you’re trying to do with it (some policies are used to replace income, some are used to build wealth, and others are used as a bank a la the CD model). Other factors come into play as well such as your age bracket, health, etc.

          I would suggest reading Missed Fortune 101 by Douglas Andrew because it explains more of what I’m talking about in depth, hopefully that will help you pick an insurance company (or companies) moving forward.

          And if you’re really interested in the creating your own bank model, I would highly suggest reading “Becoming Your Own Banker: Unlock the Infinite Banking Concept” by R. Nelson Nash.


  4. Daniel Breslin

    Thanks for the Post Dave!!

    Only this year did I realize that re-investing my profits into my main business provides the greatest return on equity in my personal situation. This brings a new challenge of never building a real investment portfolio. Find, fix, & Flip, use the profit to again find, fix & flip.

    This year I am focused on building a portfolio of assets outside my business. I have a few rentals, and one note. Those were acquired haphazardly.

    This year I’m rewriting my investment philosophy and directing my investments with a strategy.

  5. Kevin Yeats

    Dave, sorry that I am late to this game. I would add other asset classes and other characteristics.

    Commodities: oil and gold are the most common but there are many others.

    Collectibles (think Pawn Stars and Antiques Roadshow). Value is subjective. (I swear that if I went into Pawn Stars and asked for change for a $20, Rick Harrison would start with an offer of $10.)

    Cash & equivalents

    The six asset classes differ in several characteristics. You mention leverage, liquidity and the tax treatment of each.

    Limits to leverage. Leverage refers to the ability to pledge the asset against a loan. Such a pledge offers the lender some cushion against loss if the borrower does not abide by the terms of the loan (defaults). By providing that cushion, the borrower can negotiate for better loan terms (lower interest rate or longer term). If the project goes very badly, the lender can foreclose and claim ownership of the pledged asset. At this point the lender counts on the liquidity of the asset to convert that asset to cash without a large reduction in value. Different assets offer different limits on the amount and terms of any loan secured by the underlying assets. Real estate, which never migrates, will offer better loan terms that loans against car titles or boat loans. For loan against precious jewelry, most lender would expect the borrower to deliver the asset to the lender for safekeeping. Dave (in the comments) mentions how he uses his bank deposits to secure low interest rate loans from the bank.

    Affordability. What amount of personal funds would an investor need to own a unit of that asset class? Aside from cash, paper assets (stocks or bond or mutual funds) offer the lowest amount necessary while whole businesses require the most. I would not expect any minority owner of a professional sports team to have invested anything less than millions of dollars but some business franchises are more affordable.

    As the nature of the investment becomes more complex, the need to partner with other investors and attract capital becomes more necessary. I’m sure all of the readers of this blog are aware that, in most circumstances, lenders will require some skin in the game for any loan that the lender makes. That skin, however, could be a partner’s skin. Taking on partners also entails a considerable amount of legal arrangements that outline the distribution of gains and the fallout of any shortcomings – who gets the gains first and who suffers the first loss. The more formal these arrangement, the more detailed (and burdensome) any reporting requirements become.

    Finally, each investor should consider the amount of knowledge he or she will need when investing in each asset class. Paper assets offer the investor some standardized reports on the current value and past performance of the assets. A buy-and-hold investor will need to know lots of different aspects of owning a piece of real estate. That RE investor must either know how to perform those many tasks or be able to delegate those tasks to others … for a price. Much of that knowledge can be gained through reading (thank you BiggerPockets) but some just comes through experience. Even years of experience does not insulate the investor from an underperforming asset. See “The Occupants from Hell.”

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