Major asset classes explained
The financial performance of your investment or superannuation fund depends on the underlying investments and asset classes. Most super funds and managed investments provide information about the different types of assets they will invest in on your behalf. Most investments fall into four major asset classes; Cash, Bonds, Property and Shares.
Investments within each asset class generally have similar features, although it is worth noting there can be a range of risks and features for individual investments within each asset class.
Defensive Assets
Defensive assets are generally less volatile and have less potential to lose value than growth assets, however they also have a lower potential rate of return over the long-term. Cash and fixed interest investments are defensive assets.
Cash
Cash and short-term securities include deposits, bank bills and other similar assets whose price is linked to short term interest rates. Cash and short-term securities are generally the least volatile asset class and tend to offer the lowest potential return over the long-term. The income received on cash and short term securities will vary according to interest rates. Cash and short term securities are reliant on the financial stability of the provider (eg bank). In Australia, cash in bank accounts are guaranteed by the Australian government up to a value of $250,000.
Bonds (also known as fixed Interest)
A bond is a loan to a government or a company. Income received on bonds is known as a coupon payment, generally an agreed interest rate for a period of time. The capital value of bonds can rise or fall depending on interest rates, the credit rating of the bond issuer and the economy. As the bond value can fluctuate, they are more risky and offer a higher potential rate of return than cash. However, bonds are generally less risky and offer a lower potential rate of return over the long-term compared to growth assets. Note that although bonds are generally considered defensive assets, not all bonds are the same and can range from safe to very risky.
Growth Assets
Growth assets have the potential to earn a higher rate of return over the long-term but are also generally more volatile than defensive assets. Property and shares are growth assets.
Property
Investing in property provides access to income from rent charged to tenants. The value of property will rise and fall according to many factors including economic trends, interest rates, market sentiment, demographics and employment. Property investment generally requires regular maintenance and management costs to the investor. Property is higher risk and offers a higher potential return over the long term than defensive assets.
Shares
Shares are a part ownership in a company. Generally part of the company profits each year are paid out to shareholders in the form of dividends. The income shareholders receive from dividends can vary over time. However the share prices can rise and fall suddenly in response to many factors including company profits, market sentiment, industry issues and economic trends. Shares are generally higher risk and offer a higher potential return over the long-term.
Asset class features
Diversify across asset classes
Asset classes perform differently under different market conditions. By investing across a variety of asset classes you may be able to reduce the volatility of your portfolio return. Diversifying your investments within each asset class across countries, sectors, industries and individual securities can also lower the risk of your investment portfolio.
Diversification across a range of investments means you will be less exposed to a single event, so if one business or sector you’ve invested in has poor performance, you may hold other investments that are performing well.
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Contact a Gold Leaf Financial Planner today for financial advice regarding assets to invest in to reach your goals.
Any advice in this website is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.
