When deciding where to place our money we broadly think in terms of four asset classes: cash, fixed income securities, property, and shares. Each asset class has a number of distinct characteristics, such as the level of risk, the potential for delivering positive and negative returns and the expected performance in different market conditions. By understanding how each asset class works, allied to your tolerance for risk and your investment timeframes, you can see how they may be used to help you achieve your specific goals and aspirations.
Here we provide a brief overview of the different asset classes and their main advantages and disadvantages, however it’s always advisable to seek professional advice from a certified Wealth Planner to help you decide how best to use the different asset classes to meet your own particular needs.
Different asset classes can help you to achieve your financial goals
If you are looking for a stable and accessible investment option, then you may consider investing in cash assets. Cash is deemed to be the least risky asset class and the most liquid. However, it does not come without any risk, as when interest rates are lower than the rate of inflation the true buying power of your money goes down.
Cash includes physical currency, savings and current accounts, Cash Individual Savings Accounts (ISAs), premium bonds, and money market funds. When cash assets are held in a UK-authorised bank, building society or credit union you have the reassurance that if the institution fails the government will compensate you up to £85,000 per eligible person, per bank, building society or credit union.
If you have imminent spending plans you will likely need access to liquid cash funds. However, if you have savings goals you may need to consider other asset classes for some of your funds as part of a more diversified portfolio for the longer-term growth potential.
Fixed income securities
Fixed income, or bond investments, generally pay a set rate of interest over a given period, then return the investor's original investment. They tend to more stable than shares, but their value fluctuates due to interest rates and inflation.
Fixed income investments can be a reliable way to earn a steady income and plan your finances. They offer a predictable rate of return, and you can calculate how much you stand to earn and when you'll receive it. They can also be an excellent way of diversifying your investment portfolio, as they often react differently to market changes from other asset classes.
Although they are generally considered a lower risk investment, fixed income investments are not totally immune to risk. If the organisation you invest in defaults, you may lose some or all of your investment.
Overall, fixed-income investments can be the right choice for those looking for a low risk, steady income and could form part of a diverse portfolio of assets.
Property investment can include both direct property ownership or owning shares in funds that invest in commercial property. They can provide higher returns than cash or fixed income securities but may involve more risk due to market fluctuations and other factors such as rising costs and regulations.
Investing in property can be a popular way to grow wealth, but it's essential to consider both the advantages and disadvantages before jumping in. On the positive side, property is a proven asset class that has historically outperformed inflation, providing long-term growth potential. Values tend to rise and fall more slowly than shares.
However, property investment comes with various risks, such as fluctuation in underlying property values, the expense of property purchase, the on-going maintenance costs, and the risk to income if a property is not rented out. You will also need to be comfortable with a long-term investment horizon.
Additionally, property can be an illiquid investment, meaning it's not always easy to sell quickly, and you may need to accept a lower price if you need to sell your investment.
If it aligns with your investment goals and risk tolerance, then property can be an important part of a diversified portfolio.
Stocks and shares, also called equities, represent part ownership of a company. If you own part of a company and that company appreciates in value, your share of the company increases too. Furthermore, some companies pay dividends to shareholders, which can provide a regular source of income. Shares can be traded on the stock market and are subject to fluctuations based on factors such as company performance and economic conditions.
One of the most significant advantages of investing in shares is the potential for long-term gains. Historically equities have delivered better returns than lower-risk investments.
However, investing in shares also poses risks, such as the potential for share prices to decrease sometimes due to factors beyond the company's control. Economic uncertainty can lead to share price fluctuations.
Markets can recover over time, however, investing in equities requires a long-term outlook. If you need quick access to your funds, there may be better choices than shares. Overall, investing in shares can be profitable for those willing to take on some risk and commit to a long-term investment strategy.
Diversification is key
The key to any investment strategy is to understand how the different asset classes work and to consider how they could interact to form part of your long-term financial plan.
Investing wisely in a variety of different asset classes can be an effective way to build wealth. Seeking advice from a certified Wealth Planner will enable you to make considered choices and help you to achieve your financial goals.
Please note: This content is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.