Diversified investment portfolio a defence mechanism
A key decision when creating an investment portfolio is how much of each of the main types of asset classes to include.
Knowing the asset classes will assist you in selecting those that are suitable for your investment objectives.
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 as this article explains.
An asset class is a group of similar investments whose prices tend to move together. The goal when investing is to have a diversified portfolio of unit trust funds or underlying investments in different asset classes. This lowers your exposure to risk.
The four main asset classes are:
Shares, also known as equities
Most investors buy shares of companies that are listed on a stock exchange - the JSE.
Shares buy you a small part of a company. This gives you a potential share of profits the company makes. Shares provide investors with two types of returns - 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 go up and down, so buying shares is not without risk.
Cash includes money held in bank fixed deposits and money market assets, which earn interest.
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 has the highest risk of losing purchasing power over time due to inflation.
A bond is a loan, similar to the credit you may be granted.
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 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 bought and sold in the market.
Bonds tend to deliver a more regular and reliable income than shares, although the potential returns are often lower.
These investments are usually in listed commercial property - you buy a share in the ownership of a number of buildings.
These buildings might be office blocks, shopping malls or industrial properties.
Property investments can provide growth in two ways - through increases in the value of the property and rent paid by the tenants of the buildings.
It is considered long-term investment and is not low risk.
It is important to know what type of asset classes you are invested in, to see if your overall exposure to each asset class is appropriate for your investment objectives and risk profile.