There are many different asset classes in which you can invest. An asset class is a group of investment products with the same features and governed by similar laws and regulations.
When you talk about your “investment portfolio”, what you describe is the combination of all your assets invested. The most popular asset classes are:
Equities, also known as stocks or shares, represent partial ownership in a company. This ownership gives you the right to share in that company’s future financial performance. Of the major asset types – equities, bonds, property and cash, history shows that, over the medium to long term, equities have the highest potential to deliver strong returns.
That’s why many people who invest for the long run make equities the biggest portion of their portfolios. It is important to remember however that equities can be volatile.
This is why diversification, in whatever form it takes, is so essential for a well-balanced investment strategy.
Fixed income (bonds)
A bond is a debt instrument whereby you lend money to a government or a company that will borrow the funds in exchange for a fixed interest during the period of the loan and will give you back your initial investment at the end of the investment period.
Bonds have certain characteristics that are provided at the moment they are issued:
- Face value (principal): The price of the bond, what is required to pay to hold one unit
- Maturity: The date when the bond will repay the principal
- Coupon (interest): Interest paid during the loan period
- Frequency: Detail of how the interest (coupon) payments are made
Fixed Income assets are known as such as the income is fixed in nature, although the actual yield generated can vary as the price / value of the bond can fluctuate between the date of issuance and date of maturity.
Generally speaking, bonds issued by governments are the most secure investments in the market.
Cash equivalents (money market instruments)
The most common type of cash investment is holdings in bank accounts and money market funds. These offer greatest liquidity – this is why they are often used as places to keep emergency funds, or to save for short-term objectives such as a new car or home purchases.
Real estate is often considered to be a special type of alternative investment since it has unique features that are not common to equities, bonds or any other asset in the financial market.
Property is an important component for many investors. For those who buy their own home, the asset will often form a significant part of their investment portfolio and long term returns on property have been historically very attractive.
Real estate is considered to be a medium to long term investment, especially if you are considering buy to let or expect to sell when the housing market to increase in value. Furthermore, property attracts high transaction costs, which means it normally requires a long period of time to generate the returns that compensate these transaction expenses.
By way of definition, alternative investments are those asset classes that vary from traditional investments in terms of their complexity, liquidity, performance or other aspect. Examples can include gold (physical or otherwise), commodities, asset backed securities, structured notes, hedge funds and private equity. Likewise, it may include tangible assets such as wine, art, antiques or even stamps.