The big majority of money in the world is held in five asset classes. Here’s a bit more about them.
Holding physical cash provides no interest, so it usually makes sense to deposit your money into a bank or into a fund that in turn invests it in banks and financial institutions. They lend your money to others (for things like mortgages), charge interest, and then pass some of that interest back to you, the saver. Cash is unlikely to rise in value as much as the other asset classes when times are good, but it will help provide stability during the ups and downs along the way.
2. Bonds (also called fixed income, gilts)
Bonds are like an IOU from a company or government. You loan them your money and in return you’ll receive an agreed rate of interest and the promise that the loan will be paid back by a certain date. A company may issue a bond to help pay for a new factory, whilst a government may issue a bond to help pay for a school or hospital. Returns and volatility of bonds depend very much on who’s issuing them, but on average tend to sit somewhere between cash and shares.
3. Shares (also called equities and stocks)
A share is a unit of ownership in a company – like a slice of a company. People buy and sell these on the stock market. Returns from shares come in two forms – first from dividends, where a large company may pay around half its annual profits back to shareholders, and second through the share going up or down in value. Companies can also reinvest profits to help them grow. For example, Apple used profits from selling its Macs to invest in developing the iPhone. That investment led to a huge increase in future profits (Apple is now the first US$1trillion company), which has been reflected by the growth of their share price.
Property assets are the most tangible of all the assets classes and can be broken down into residential and commercial. Many people make an ‘investment’ in residential property by buying their home. Over time this can be a good investment as price appreciation tends to match or beat inflation, and gains are tax-free. It’s worth noting that investing smaller amounts in residential property is tough and houses can sometimes take time to sell. Another way to gain exposure to property – usually commercial – is through a property fund. This is where you pool your money with lots of other investors and the fund buys properties across a range of sectors from offices to shopping centres.
These are the materials that we consume like wheat, oil and gas, wood and metals. Prices tend to rise when the global economy is growing, and demand increases for the raw materials that are used to make everyday items. Commodities can be very volatile and there’s little evidence to suggest that they provide inflation-beating returns over the long term.
Quiz: Which of the assets below is likely to deliver the highest returns in the long-term?
- Find out how you should put these all together to achieve the returns you want, with the level of risk you’re prepared to take.
*Source: Cambridge Dictionary
Quiz answer: 3
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is not a reliable guide of future performance.