Asset classes are a group of investments that are similar in terms of the regulations and stipulations that apply to them, and react similarly on the market.
It’s important to understand the different asset classes in order to build a diverse, sustainable and stable investment portfolio. If you have only invested in one asset class and its value starts to decrease it can be detrimental to your entire portfolio, whereas a diverse investment portfolio has a better chance of remaining profitable due to its reliance on a range of different markets. Although many believe there are more than five asset classes, all of the main forms of investment can be divided into five categories: equities, commodities, cash, bonds and property.
Equities refers to the stock market and shares in publicly traded companies. Profits from these investments arise from the receiving of dividends or the rise of company value on the stock market, which causes the value of each share to increase. However, equities can be volatile and market changes can be difficult to predict: for example, shares in companies such as Tesla can depreciate based upon incidents as little as an unexpected tweet by Elon Musk. As such, investing in stocks can be challenging, and investors will likely not be able to sit back and watch their profits soar – the market experiences peaks and troughs that must be closely analysed and monitored to make the most out of this asset class. Alternatively, you can invest in funds, these are premade portfolios of different stocks and shares that are managed by a fund manager, which takes some of the hassle away from you. You can select the amount of risk you would like to take on and can invest across different funds to optimise your returns. Although this requires much less hands-on commitment, this strategy can still be relatively volatile, so it is still advised that equities make up a proportion of your portfolio rather than the entire thing.
This refers to materials or products that are sold on global markets where value is dictated by supply and demand – this can refer to collectibles, metals, energy, agriculture, etc. With supply and demand for these products being rather volatile, commodity values can soar at a moment’s notice, which can produce huge returns on investment. However, such volatility makes commodities as an asset class extremely high-risk, with the future of your investment being far from certain or predictable. In this way, commodities pose similar risks to equities.
This asset class constitutes physical currency, savings, current accounts and cash ISAs. This government-backed asset class doesn’t pose any capital risk and is therefore deemed one of the safer forms of investment, but is not without its disadvantages. Inflation can bring the value of cash crashing down so although your capital is not eroded, it won’t be worth as much on the market. As such, cash limits your investment from growing sustainably over a long period of time but can provide a secure base on which to diversify into different asset classes.
Bonds and other fixed income investments pay a rate of return in the form of interest which, over time, accrues. Corporate and government bonds are issued with the commitment to pay interest at the point of maturity at the end of a set term. Although less of a ‘rollercoaster’ than the ever-changing equities asset class, bonds are reliant on a continuously stable economy. Inflation and interest rates will directly impact fixed income investments and although economic downturns are sometimes predictable, bonds can produce lower returns than other asset classes.
We may be a little biased, but at Centrick we are passionate in our belief that property is the most reliable asset class and can be the best way to invest your funds for long-term yields and even financial freedom. The reason property is such a reliable asset class is because it will never be redundant – people will always require accommodation. Even during the pandemic when commercial property was deemed unnecessary as staff worked from home, the commercial sector remained remarkably buoyant, demonstrating the resilience of the asset class.
Property investment can take many forms, making it suitable for all types of investors: whether you wish to spend your funds buying your first home, creating a diverse lettings portfolio, or leasing storage and retail spaces to businesses – the possibilities are endless. What’s more, property prices have a good track record of continually beating inflation, which can especially be true if your portfolio is diversified across different locations and property types. At Centrick, we offer a tailored asset management service to clients that are looking to explore the benefits of property as an asset class, or want advice on which direction to take their portfolio. We can help you to:
Contact Centrick using the form below for more information on how we can help you make the most out of your investments:
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