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Asset classes explained
Shares, or equities, are issued by a company to raise money to develop the business. They are considered one of the best investments to achieve good long-term returns, but they can be quite volatile in the short term with their value likely to fluctuate.
An active fund manager will aim to use the volatility of asset prices to provide a better return for investors – for example, taking advantage of a potentially brief fall in a company’s share price to buy more of their shares at the lower price.
Property investments can take the form of direct property (bricks and mortar) or property securities. Commercial properties like offices and warehouses are one type of direct property. They are bought and then leased out to generate income from the rent charged. There is also the potential for capital growth. Returns are generally lower than shares but are potentially higher than cash and fixed interest investments.
Property securities are the shares of property investment companies, which may own commercial and residential properties. They are stock-market-listed companies, and their returns can be affected by the performance of global stock markets as well as the underlying portfolio of properties held. For this reason property securities tend to carry a higher risk than direct property investment.
A loan or bond issued by a company or government over a set period of time in return for a fixed interest rate as well as the return of the original capital. Different types of bonds have different levels of risk. These assets offer the potential for a better return than cash in the long run but generally they are considered lower risk than shares and property.
Includes cash and also other money market securities that earn interest over time. Normally considered to be a temporary haven during periods of investment market volatility, or for short-term needs. However, the real value of an investment in cash may be eroded over time by the effects of inflation.
There are also a number of alternative assets, such as commodities. These are raw materials, including grain, oil, copper and gold, which are traded on their respective markets.
Soft commodities are goods that are grown, while hard commodities are the ones that are extracted from the ground through mining. They offer portfolio diversification, because their prices do not always move in tandem with stock markets. However, commodities are higher risk investments and their performance is likely to be volatile.
This simply means deciding how to spread your money across the different investment categories. It’s about maintaining the right balance and making sure you have a diversified portfolio, tailored to your specific needs.
Your financial adviser will be able to help you establish an asset allocation that fits with your financial goals and your attitude to risk.