When creating an investment portfolio, one factor that is central to our decision making at Inkunzi Wealth Group is the main types of asset classes. This assists us in selecting an asset class that is suitable for your investment objectives. In the end, the growth of your investment comes from the underlying asset classes in your portfolio. The risk profile, benefits, and features of these asset classes are different. In this article, I explain the various asset classes.
Asset classes are building blocks for your investment An asset class is a group of similar investments whose prices tend to move together. They can be defined on a general level as cash, bonds, property, and shares. The concept of asset classes is important, as one of the common goals when investing is to have a diversified portfolio. This is a portfolio made up of unit trust funds, which invest in different asset classes. A diversified portfolio lowers your exposure to risk as different asset classes perform differently in different market conditions.
The four main asset classes are:
Shares, are also known as equities. Most individuals generally buy shares of companies that are listed in the stock exchange or the Johannesburg Stock Exchange, as we know it locally. Shares buy you a small part of a company. This gives you a potential share of any profits that the company makes. Shares are designed to provide investors with two types of return, annual income, and long-term capital growth. Most shares offer income in the form of dividends, which are typically paid twice a year. Dividends can be seen as a reward for shareholders. They are paid when a company is profitable and has cash in the bank after it has satisfied all its obligations. Share prices may go up or down so buying shares is not without risk but, over the long-term, they can generate good returns. If you want to double your money in a year, for example, buying shares may not be the best way to do it.
Cash includes money held in bank deposits and money market assets, which earn interest over time. The most used types of underlying asset when investing in cash is fixed deposit accounts, money market accounts, and money market unit trusts. Cash provides a stable low-risk investment and is considered the safest asset class. It tends to deliver a more regular and reliable income than shares, although the potential returns are lower compared to other asset classes over longer periods. Cash as an asset class has the highest risk of losing purchasing power due to inflation. This happens when your investment does not grow faster than inflation. Your invested money may not be able to buy you the same amount of goods and services in the future.
A bond is a loan, similar to normal credit given to individuals. A government or company wanting to borrow money issues bonds. They are usually referred to as fixed interest assets. By buying corporate or government bonds, you are lending money to those governments or companies in return for regular interest payments and the return of your capital when the bond matures. Your return from bonds comes from the interest the company or government pays and any change in the price of the bond. The value of a bond is particularly sensitive to changes in interest rates. Fluctuations in the price of bonds tend to be smaller than those of shares. Bonds tend to deliver a more regular and reliable income than shares, although the potential returns are often lower.
An investment in property usually focuses on listed commercial property, meaning that you are buying a share in the ownership of a number of buildings. These buildings might be office blocks, shopping malls, and industrial properties. Property investments can provide growth in two ways: through rises in the value of the property and rent paid by the tenants of the buildings. It is considered a long-term investment and is not low risk.
Diversifying asset classes brings peace of mind The world is filled with options on where you can invest your money. Owning a portfolio that consist of investments in a variety of asset classes can help reduce the risk in your portfolio. It is important to know what type of asset classes you are currently invested in to see if your overall exposure to each asset class is appropriate for your investment objectives and risk profile.