The 4 Main Asset Classes – Boost your Investment knowledge

When it comes to investing there are four main types of assets: cash, fixed interest, property and shares.

Although there are other assets available, these are the most common.

Cash

Cash is generally regarded as the most secure asset class however it also produces the lowest return over the medium to longer term. It’s generally suitable for short term investors who require stable returns over a relatively short period of time. Cash investments typically include bank accounts and cash management trusts.

Fixed interest

Fixed interest investments offer investors a regular income for a specified term with the expectation that the principal will be repaid at the end of the term (maturity date). Fixed interest investments generally involve lower risk than shares and property, but sit higher on the risk spectrum than cash. Consequently, the returns from fixed interest are generally slightly higher than for cash. Fixed interest investments include corporate bonds, government bonds, semi-government bodies and debentures.

Property

Property is a favourite investment type for many Australians with the ability to generate relatively higher returns through rental income and capital growth (if the value of the property increases over time). However, as an investor, it’s important to keep in mind that property is an asset class like any other and is subject to rises and declines in value over time. It’s also important to keep in mind that the upfront costs of investing in property can be significant, with stamp duty, legal fees and other costs such as pre-purchase pest and building inspections potentially adding about 5% extra onto the property’s purchase price.

This is one reason why residential property is generally regarded as a longer term investment. It can take time to recoup those upfront costs. Also remember that if you need access to your money at short notice, property may not be the ideal investment as it can take several months to sell depending on market conditions at the time.

Shares

Shares, also known as stocks or equities, are a popular investment choice for many Australians. As an investment, shares have lower and fewer upfront costs compared to property. There are no ongoing costs, and, depending on the share you choose to invest in, shareholders can earn regular income through dividends as well as enjoying the potential for long term capital growth. Having said that, it’s important to understand that share prices rise and fall and the payment of dividends and the return of capital are not guaranteed.

When you invest in shares listed on the Australian Securities Exchange (ASX), you are effectively buying ‘a slice’ of a public company. As a part owner, you may be entitled to a stake in the company’s profits. This is paid out to shareholders as ‘dividends’. As the company’s business grows over time, the value of the shares may grow, and this can provide capital growth for shareholders. With thousands of companies listed on the ASX, there is a wide variety of companies and industries you can invest in through shares.

SOURCE: Capstone Financial Planning