Understanding the Asset Classes in a diversified portfolio
While some people enjoy being actively involved in their investment accounts, others prefer to leave it to the experts – that’s what we’re here for, after all. But regardless of how much you engage on a day-to-day basis, it’s worth having a broad awareness and understanding of the different asset classes in a diversified portfolio.
What is an asset class?
We use the term asset class to describe investments with similar characteristics and market behaviours. A diversified portfolio is made up of investments across a number of asset classes.
These are also known as shares and are traded on the stock market. Equities can earn you money either through capital gains (i.e. by increasing in value) or by paying dividends – when the company you own shares in decides to pay out some profits to its shareholders. While equities can be very lucrative, there is a higher level of risk attached to this asset class, which can fluctuate in value.
Cash investments are preferred by low-risk investors and are usually best over the short term, or even as a temporary measure. Cash investments are usually quite stable, but don’t often produce huge returns. Over the past ten years, cash has provided an average return of 3% per year.
Bonds are a fixed interest asset class offered by governments and companies alike. They can provide quite steady returns over the longer term and are typically viewed as less risky than equities because the provider commits to a fixed level of interest upon issuing the bond. Fixed interest bonds have offered a return of around 3-4% per year over the past ten years.
The type of property you invest in will depend on your fund. Some prefer residential, although most will steer you towards the commercial. Don’t always assume a property asset means bricks and mortar – you may also investment in property development companies with a bright future.
The term ‘commodities’ is used to cover a range of different investments. What unites them is that they are all, essentially, ‘raw materials.’ Whether precious metals like gold, energy sources like oil or agricultural stock like grain, commodities are a broad category and offer varying performance. Metals like gold or platinum are a classic ‘defensive’ asset in most portfolios, since they are rarely affected by downward market movements and often increase in price when other asset classes waiver.
If you’d like to talk through the structure of your particular investments, I’m always happy to chat so please don’t hesitate to get in touch.