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Explained: The 4 main asset classes that could form part of your portfolioPublished: March 22, 2023 by Jennifer Armstrong
You may have come across the term “asset class” when reviewing your finances or investing, but what does it mean? And which asset class suits your goals?
In finance, asset class is often used to describe a group of investments that are similar and are subject to the same regulations. There are four main asset classes – cash, fixed income, equities, and property – and it’s likely your portfolio covers all four areas even if you’re not familiar with the term. Your pension, for instance, may hold a mix of these four types of assets.
There are pros and cons to the different asset classes. However, a mix of assets can help you create a balanced portfolio that reflects your risk profile.
Read on to discover how the four main asset classes could add value to you.
The 4 main types of asset class that could help you reach your goals
Cash is the asset class that people are most familiar with, and it’s something you use day-to-day.
The benefit of cash is that you’re not exposed to risk. If you deposit money in your current or savings account, you know it won’t be exposed to market volatility – when you need to access it, the cash is there.
Thanks to the Financial Services Compensation Scheme (FSCS), so long as you save with a UK-authorised bank, your money is even protected if the financial firm fails.
The FSCS could compensate up to £85,000 per person, per bank, building society, or credit union. However, you should keep in mind that some firms trade under the same banking licence, which the FSCS treats as one bank. You can visit the FSCS website to check which firms share a licence.
As a result, cash is often seen as “safe”. It may be a good asset class to hold wealth if you need access to it, are building an emergency fund, or have short-term goals. According to the government, around three-quarters of ISAs hold cash rather than investments.
However, the drawback is that once you consider inflation, the value of cash may fall in real terms.
While you may earn interest on cash deposits, it’s unlikely to match the rising cost of living. Gradually, what you can buy with your cash will fall, and it adds up over the long term. So, if you’re saving for long-term goals, alternatives may be better suited.
2. Fixed income securities
Fixed income securities or bonds do involve some risk. However, they are typically lower risk than investing in equities.
You can view fixed income securities like a loan that’s been split up and sold to different investors. Companies or governments can issue them.
When the fixed-income security matures, after say one or three years, you’ll receive the initial money you paid for it back. You can use fixed income securities to create an income if you receive regular interest payments. You can also use them to reach growth goals if you would receive a larger lump sum once it matured.
While often less risky than investing in stocks, you should still consider who is issuing the bond and whether they’re likely to default. There is still a risk that you could lose your money.
Equities, also known as stocks and shares, are where you purchase a share of a publicly-traded company.
You can trade equities on stock exchanges with the hope to sell them for more than you bought them to deliver a return. The value of shares is determined by a range of factors, including the company’s performance, economic forecasts, and investor demand. As a result, the value can be volatile and could fall.
Historically, markets have delivered returns over the long term, but also experience volatility. So, you should view investing as a long-term part of your financial plan – often it’s advisable to invest with a minimum time frame of five years. This means there’s more opportunity for the peaks and troughs to smooth out.
When investing, your risk profile is crucial and helps you make decisions that reflect your goals.
Over the last few decades, the value of property has soared in the UK and other parts of the world.
There are several different ways property could be part of your financial plan.
You may own your home, which has likely increased in value over the long term. You may decide to access some of the property wealth in your home in the future, for instance, by downsizing. Or you could have buy-to-let properties that you use to deliver an income, and potentially a return when you sell them.
In addition, a balanced investment portfolio will often include property too. Property funds will typically invest globally in commercial property, like offices or warehouses. Part of your pension, for example, could be invested in a property fund.
While property prices have historically increased over the long term and experience less volatility than stocks, they can fall. So, as with other types of investment, you should take a long-term view and weigh up the risks.
Other assets may be part of your financial plan too
As well as the main types of assets, there are also others that you may hold that could support your financial plan.
Alternative assets could include commodities like gold, currency, or tangible assets. As with other assets, it’s important to consider how these could fit into your overall plan and the risk that’s associated with them before you part with any money.
Contact us to talk about how to get the most out of your assets
Deciding which assets are right for you can help you get the most out of your money. We’ll work with you to create a bespoke financial plan that has your goals at the centre, so your assets reflect your priorities and risk profile. Please get in touch to arrange a meeting with one of our financial planners.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.