Wealth management for beginners, Part 1: Explaining asset classes
With the new year in full swing, Cornerstone Investment Advisory Services are even more committed to growing and building the wealth of our valued clients. We believe that one of the biggest steps to financial freedom is education and improved understanding of how investments are put together and how growth is determined.
To help you get a better understanding of the intricate world of wealth management, we have created an all-new educational series of articles, specifically aimed at empowering our clients to be better equipped to make the best financial decisions they can.
In part one of our series we’ll explain and explore asset classes, what they are, how they produce returns and what they mean for you as an investor. It’s vital to remember that this article can never replace experienced and qualified advice from a registered wealth manager or financial planner. For specialist advice and bespoke financial solutions, get in touch with Cornerstone Investment Advisory Services today.
In its simplest form, an asset class can be defined as a group of the same types of investments that the public can access and invest in. The most commonly used asset classes are equities, bonds, listed property and cash. Each of these asset classes are unique in the way they are structured, their associated risk, the potential returns and historic behaviour.
Equities, commonly known as stocks or shares, represents a share of ownership that you can buy in a company. It’s advisable to invest in companies that are listed in the stock market to ensure that you have a transparent view of stock prices as they are published daily. What you pay for equities is based on a variety of factors including the company’s performance, company size, capital structure, dividends as well as the public sentiment towards the company. For example, a company might be doing well financially, but if the CEO is involved in a public scandal it may affect the company’s stock price.
Around the globe, equities have historically produced the best returns, especially to those who stayed invested over the long term i.e. more than seven years. However, they are considered as the riskiest asset class, due to the volatility and daily movements on the stock market which can cause large gains or losses over the short term. It’s therefore always a good idea to stay invested for a long period when selecting equities as an asset class.
In layman’s terms, investing in bonds mean that you are lending money to governments or companies in return of regular interest payments as well as the full payment after a certain period. There are government bonds (also known as gilts, or sovereign bonds) and corporate bonds (also known as credit bonds). Bonds are particularly appealing to investors who require regular income and some capital growth with relatively low risk.
Although bond returns are linked to interest rates that changes regularly and sometimes sharply, bond prices and returns have historically been less volatile than equities and have returned a more stable fixed income over time.
Property companies that manage and develop properties and are listed on the stock exchange, generally make up the asset class listed property. In short, investing in this asset class will give you the benefits of real estate (commercial, industrial and residential) without the hassle of being a landlord. Listed property is also an equity which means that its performance is linked to the performance of the property companies. However, there is a slightly lower risk compared to equities, because the returns are largely based in rental incomes that rises over time, making it less volatile and steadier.
You may have heard the term “money market” before. The cash asset class and money market instruments are often used interchangeably and refer to a range of securities that pay out regular interest within shorter periods of time, usually within a year. These securities can include banker’s assurances, promissory notes, certificates of deposit and company commercial paper.
If you need a low risk, short-term investment where you can access your money quickly, a cash investment will suit you best. The returns often keep up with inflation and your contributions (the amount of money you invest each month or each year) are flexible. It’s especially valuable for goal-oriented savings like a new car or a deposit on a home loan.
A qualified and experienced wealth manager will almost always advise a “mix” of asset classes to give you the best possible return with the lowest risk. Having all your eggs in one basket or all your money in one asset class will most likely increase your risk. Remember to contact us today for customised advice and portfolio structuring to meet your individual needs. Also, for more financial news, events and useful tips, follow us on Facebook and LinkedIn and subscribe to our newsletter by clicking here.