What are asset classes and how do I use them to build my wealth?
Asset classes refer to types of assets you can invest in to build your investment portfolio. If you understand what they are and how to invest in them appropriately, you can grow your finances significantly in the medium and long term.
When building an investment portfolio, it's important to understand what you can invest in and what your investments can do for you. Essentially, the idea is to maximise your returns and to minimise your risk as much as possible. This is where asset classes come in.
There are four main asset classes: cash, bonds, equities, and property. Each of these classes has a different level of risk and return.
Getting to know the asset classes
Cash as an asset class includes fixed deposit accounts, money market accounts, and money market funds. It has the lowest risk of losing capital, but the highest risk of losing value because of inflation.
2. Bonds
Bonds are loans that companies or governments take out and pay back with interest. There are many different kinds of bonds, like government bonds, corporate bonds, or municipal bonds. These types of bonds are generally lower-risk investments, but the value of the investment depends on how credit-worthy the company, government or municipality is. The value of the investment can also be impacted by changes in interest rates.
3. Equities
An equity investment is money you invest by buying shares in a company, which are then traded on the stock market. Because share prices change daily, based on supply and demand, equities are quite unpredictable. However, equity investments generally offer the highest level of returns over the long term.
4. Property
Property as an asset class includes listed property, property trust funds, direct property investment, and property syndicates. Property is a good asset class to invest in if you want to diversify your portfolio. Its success as an investment is also not too reliant on the success of the other asset classes that you invest in.
The pros and cons of each asset class
Each asset class functions differently in your portfolio. Here's a helpful table to understand the benefits and risks of each one.
|
Class |
Benefits |
Risks |
|
Cash |
|
|
|
Bonds |
|
|
|
Equities |
|
|
|
Property |
|
|
Building your portfolio
Now that you know a little more about the asset classes, you might want to start thinking about how you can use them to construct a strong investment portfolio.
A strong portfolio needs to balance risk and return. It should also be diversified, so that you have investments in each of the asset classes. With the right balance of each asset class, your portfolio can help build wealth and secure a more stress-free financial future for you.
This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life assurance products are underwritten by Discovery Life Ltd. Registration number: 1966/003901/06, a licensed life Insurer, an authorised financial service provider and registered credit provider, NCR Reg No. NCRCP3555. Product rules, terms and conditions apply. Discovery Life International, the Guernsey branch of Discovery Life Limited (South Africa),is licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002, to carry on life insurance business.
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