Understanding Asset Classes
Asset Class Overview
Taking you through what you need to know about Asset Classes, the risk profiles of each and explain how you can spread risk through diversification.
Cash
What?
Savings and current account balances; Cash ISAs; premium bonds
Risk profile: Low Over time inflation can erode the value of cash.
Fixed Income
What?
An investment that usually provides a fixed, regular income over a set period of time. A fixed income investment is often referred to as a bond.
Risk profile: Relatively lowBonds are issued by a government or a company in return for a loan. The issuer of the bond undertakes to repay the loan at a set point in the future (the maturity date). Bonds can be bought and sold by investors before they mature, and their value can fluctuate.
Property
What?
Residential and commercial property. Examples of commercial property are offices, shops and warehouses.
Risk profile: MediumThe value of property can fluctuate and it can be hard to sell property assets quickly.
Equities
What?
An ownership stake in a company listed on the stock market - also known as shares.
Risk profile: Medium to highUsually higher risk than cash and bonds. Equities can rise and fall in value, so there is the potential for losses as well as gains. Many companies distribute their profits to shareholders through dividends.
Other Asset Classes
What?
Investments that don't fall into the main asset classes, including: Commodities, eg. oil, coffee, gold, Foreign currency, Collectibles, eg. art and antiques
Risk profile: HighGenerally regarded as high because their value depends on conditions within a specific market.
Asset allocation and diversification
If you invest in only one asset class and its value drops, your investments could suffer.
The values of different asset classes can rise and fall independently of each other. By spreading your money across the different asset classes, you can spread your risk. This is known as diversification.
You can diversify further within an asset class by company, sector and geographic region.
Funds and diversification
Funds are an easy way to diversify your investments.
They can for example invest in different companies and sectors; some can also invest in different geographic regions and asset classes. Eg. An Asia Pacific equity and might include 50 different holdings, spread across 12 countries.
How to
Do you understand the risk/reward relationship of investing?
Understanding risk and working out how much risk you are comfortable taking is a critical part of investing.