Vary portfolios for peace of mind
Types of asset classes carry different risk profiles
When creating an investment portfolio, these are the types of asset classes to assist you in selecting those suitable for your goals.
Ultimately, the growth in your investment comes from the underlying asset classes in your portfolio. The risk profile, benefits and features of these are different.
Asset classes are building blocks for your investment
An asset class is a group of similar investments whose prices tend to move together. They can be defined on a general level as cash, bonds, property and shares.
The concept is important as one of the common goals when investing is to have a diversified portfolio. A diversified portfolio lowers your exposure to risk as different asset classes perform differently in different market conditions.
The four main asset classes are:
Shares, also known as equities
Most individuals generally buy shares of companies on the stock exchange or Johannesburg Stock Exchange. Shares buy you a small part of a company. This gives you a potential share of any profits the company makes. Your return occurs in the form of regular dividends or when the share price rises, referred to as a capital gain.
It is important to know that over the short-term, the value of money invested in shares can go up and down a lot. You must be comfortable with significant share price movements to invest in shares.
Cash
Cash includes money held in bank deposits and money market assets, which earn interest over time. Cash provides a stable low-risk investment and is considered to be the safest asset class. It tends to deliver a more regular and reliable income than shares, although the potential returns are lower. The mostly used types of underlying asset when investing in cash is fixed deposit accounts, money market account and money market unit trusts.
Cash as an asset class has the highest risk of losing purchasing power due to inflation. This happens when your investment does not grow faster than inflation.
Bonds
A bond is a loan, similar to normal credit given to individuals. Bonds are issued by a government or a company wanting to borrow money. They are usually referred to as fixed interest assets. By buying corporate or government bonds, you are lending money to them in return for regular interest payments and the return of your capital when the bond matures. Your return from bonds comes from the interest paid and any change in the price of the bond.
Property
An investment in a property usually focuses on commercial property, meaning that you are buying a share in the ownership of a number of buildings. These buildings might be office blocks, shopping malls and industrial properties.
Property investments can provide growth in two ways: Through rises in the value of the property and rent paid by the tenants of the buildings. Property prices tend to go up and down over longer time periods than many other asset classes and rental income will be impacted if tenants leave. It is considered to be a long-term investment and is not low risk.
Diversifying asset classes brings peace of mind and owning a portfolio that consists of investments in a variety can help reduce risk. It is important to know what type of asset classes you are invested in, to see if your overall exposure is appropriate for your investment goals.
Contact Inkunzi Wealth Group on 087160-0018 or SMS 082-572-3214 for all enquiries. Also on invest@iwgsa.co.za.
‘‘ On a general level, these are defined as cash, property, bonds and shares