Get to know Asset Classes

When you think of investing, do you immediately picture people in suits, in-depth spreadsheets, Gamestop or Leonardo Dicaprio in Wolf of Wall Street? We get it, for many of us, investing can seem daunting and confusing. 

Stay with us though, we are here to convince you otherwise. There is no denying that the investment landscape is dynamic and ever-evolving, but the basic principles aren’t as difficult to understand as you might think.

In this blog, we are going to start with the basics, an overview of the various types of asset classes aka a group of investments that act similarly. We’ve kept it brief, but will be diving deeper into each type of asset class and their investment vehicles over the coming weeks. 

Let’s break down asset classes.

What’s an Asset Class?

Okay so, an asset class is a category of financial instrument - these can be physical assets i.e. real estate or financial assets i.e equity stocks. 

They are grouped into asset classes based on whether they show similar characteristics, behave in the same way on the market, or are subject to the same laws and regulations.

Types of Asset Classes

Cash Equivalent

Typical investments: Coins, cash, bank deposits, Cash ISA 

The safest and simplest to understand is cash, which includes cash in any form i.e. coins, notes, bank deposit. This is the safest & most liquid form of investment as it can be easily converted into cash. 

The downside of this asset class is the risk inflation poses as the interest rate in a savings account rarely beats inflation. For example in the UK, the inflation rate on average sits anywhere between 1-2%, so when compared to a savings account interest rate of 0.5%, the value of your money is decreasing every year.

Equities (stocks)

Typical investments: Purchase of equity in a company listed on the stock exchange

Equity in something represents ownership. When you purchase shares in a company, you're purchasing ownership in that company. 

So for example, if a company is split into 100,000 shares and you purchased 2000 shares, you now own 2% of the company. Given you’re now a part-owner you are entitled to a portion of the companies profit, this is usually paid out to an investor in the form of a dividend. However, this differs from company to company, as some companies choose to reinvest profits back into the company for growth.

Equities investments have the possibility of a higher return, so they can be a good investment opportunity to beat inflation. However, the market share price is subject to many factors and therefore can fluctuate, sometimes due to external reasons the company cannot control. So, to get the most out of this investment type, you should consider this a longer-term investment.

Commodities

Typical investments: Oil, gold, beef

Commodity trading is one of the oldest forms of investing. What was once trading spices & silks, commodities are typically sorted into four broad categories: metal, energy, livestock and meat, and agriculture. 

The commodity market is more volatile, they tend to be known as risky investments as their market (supply & demand) is impacted by uncertainties that are difficult or impossible to predict. 

So for example, during a global pandemic and worldwide lockdown, people will be driving less and therefore the demand for oil may fall causing fluctuations in the commodities price. Or if a hurricane damages an entire agricultural region & destroys crops, the supply likely cannot meet demand, therefore the price may rise.

For investors, commodities can be an important way to diversify their portfolio beyond traditional securities as it can be a good way to secure your wealth against inflation, thanks to the rise in price of goods & services.

Real Estate

Typical investments: Buying a home or investing in buy-to-let

 Investing in real estate can take many forms, such as buying your own home, getting involved in commercial property, like offices, warehouses, and retail space or investing in a REIT (more on that later). 

 Opportunities exist to invest in both small and large-scale projects, ranging from a single buy-to-let to joining an investment fund that owns large-scale commercial sites. 

As with any investment, real estate investment carries its own risk and often needs a longer term investment to produce the best returns, particularly if you want to take advantage of an improving house market. Alternatively, renting out a property can provide another regular stream of income. 

Taking on a mortgage or even buying outright is a major financial commitment and requires a large initial outlay, so it needs to be an investment that you're going to be comfortable with for the next few years.

Fixed-Income investments  

Typical investments: Bonds

Bonds are another popular and common asset class. A bond is essentially an agreement of you (the lender) loaning to a bond issuer, which can be the government or corporate firms.  

In return for this loan, the institution promises to pay interest on the loan in the form of periodic payments. The terms of the bond differ from agreement to agreement, but typically include interest rates, payout frequency and the length of the loan.

As Fixed-income investments usually pay a set rate of return in the form of interest, they are generally considered less risky than investing in equities or other asset classes.

Other investments

Typical investments: Art and antiques, wine, watches, Classic Cars 

Outside of the above asset classes, there are a few other areas for investment. These all carry different levels of risk and should be individually considered. 

Art, antiques, stamps, watches, wine, and jewellery are all examples of valuables that have been traded for centuries. 

There are also many new asset classes that have only recently emerged i.e. cryptocurrencies, demonstrating just how diverse the investments marketplace can be. 

As you can see, each type of investment comes with its share of risks, pros, and cons. Now that you have a general understanding of the different asset classes, choosing which to consider investing in is the not-so-general part. It’s important to remember that investing is completely situational and choosing the right investment for you depends on your own financial goals, risk tolerance, and where you are currently with your financial journey.

The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.

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