Investing: The different types of asset classes
- Posted by Palladium Wealth Partners
- On November 14, 2019
- 0 Comments
Taking the time to work out what your financial goals are is a vital part of goal-setting. It helps to not only frame where you want to see yourself in future, but also the path to take to make it a reality.
The accumulation of sufficient wealth to generate income to self-fund your envisioned retirement lifestyle; a financial goal that many of us share in common. However, how each of us works towards achieving that goal, can be vastly different.
For example, the structure (e.g. super and/or non-super), the method (e.g. direct and/or managed funds), and the assets (e.g. cash, fixed interest, property and/or shares) chosen can vary from one person to the next.
Still, in all of these various paths that can be chosen, there is again a commonality that we share. Asset classes. We all invest in either one or more of the different types of asset classes to help achieve our financial goals.
The different types of asset classes
There are four main types of asset classes that can be invested in. Namely, cash, fixed interest, property and shares. Each has its unique characteristics, inclusive of the level of risk and return.
Having an appropriate understanding of these different types of asset classes, and what to expect from each of them, can help with making an informed decision as to which to invest in to help achieve your financial goals.
When it comes to the unique characteristics of each asset class, the details are often not standard across the board. This can be due to the unique characteristics of ‘sub-classes’ within each asset class, as well as the chosen underlying individual investment itself. For example, in terms of fixed interest, and risk and return:
- government bonds versus corporate bonds,
- AAA-rated government bonds versus AA-rated government bonds.
Below is a general overview of the unique characteristics of each asset class.
Defensive assets include cash and fixed interest.
Broadly speaking, those that invest in defensive assets can generally expect, in contrast to growth assets, a lower degree of volatility over the short-term, but lower returns over the long-term.
|Unique Characteristics of: Cash|
|Rate of return||Low|
|Returns||Income (regular interest payments)|
|Risk level||Very low|
|Time horizon||No recommended minimum|
|Examples||Transaction accounts, savings accounts, and cash management trusts|
Please read our learning module section, ‘Cash’, for more information on this type of asset class.
|Unique Characteristics of: Fixed Interest|
|Rate of return||Moderate|
|Returns||Income (interest payments for an agreed period) and potential capital growth (or loss)|
|Risk level||Low to moderate|
|Time horizon||Short to medium-term|
|Examples||Term deposits, government bonds, corporate bonds, and debentures|
Please read our learning module section, ‘Fixed Interest’, for more information on this type of asset class.
Growth assets include property and shares.
Broadly speaking, those that invest in growth assets can generally expect, in contrast to defensive assets, a higher degree of volatility over the short-term, but potentially higher returns over the long-term.
|Unique Characteristics of: Property|
|Focus||Income and capital growth|
|Rate of return||Moderate to high|
|Returns||Income (rent) and capital growth (or loss)|
|Examples||Residential property, commercial property, and industrial property|
Please read our learning module section, ‘Property’, for more information on this type of asset class.
|Unique Characteristics of: Shares|
|Focus||Income and capital growth|
|Rate of return||High|
|Returns||Income (dividends) and capital growth (or loss).|
|Risk level||Very high|
|Examples||Australian shares and international shares|
Please read our learning module section, ‘Shares’, for more information on this type of asset class.
In broad terms, when it comes to achieving your financial goals:
- If you have a short-term time horizon, and preserving your capital is of high importance – defensive asset classes, such as cash and fixed interest, may be a relevant consideration.
- If you have a long-term time horizon, you do not need immediate or significant income, you are comfortable with volatile investment values, and you want to grow your assets – growth asset classes, such as property and shares, may be a relevant consideration.
Whilst we have provided an overview of several of the unique characteristics of each asset class, many other investment-related considerations need to be taken into account prior to deciding to invest.
As such, after reading this article, you may also find the following of interest:
- Asset allocation.
- Compound interest.
- Risk and investment.
- Dollar cost averaging.
- Goals-based investing.
- Investment risk profiles.
- Nominal versus real rate of return.
- Diversification and portfolio construction.
- Investment market cycles and investor sentiment.
If you have any questions regarding this article, please do not hesitate to contact us.