Asset allocations are divided into classes according to their features - whether they produce income, capital growth or both. The most appropriate asset classes for your investment will depend on how much risk you wish to take and the amount of time you want to keep your investment.
The two broad types of asset classes are:
Income-producing assets tend to be more appropriate for short-term investors or those who prefer safer, more secure investments with more consistent returns.
Higher risk, higher-return assets tend to be more appropriate for long-term investors who are willing to ride out the peaks and troughs that their investment may experience.
Types of investments in each asset class
Historically, shares have generated higher returns than all other asset classes. Over time, international shares have performed better than Australian shares, but Australian shares generally provide steadier income and may offer tax benefits.
Shares are easily traded, which makes them a flexible investment. However, with the potential for high returns comes higher risk. The value of shares can fluctuate significantly, so they should be monitored. They generally are suited to longer-term investing.
Like shares, you can invest in property in two ways.
- Directly – where you buy real estate.
- Indirectly – where you invest in a fund, such as a property trust, which uses pooled investor funds to buy real estate.
Property trusts typically invest in prime commercial, retail and residential property. Although property is generally a moderate risk investment, it is susceptible to fluctuations in market demand. A main shortcoming is the time and expense involved in trading it. Property is typically best suited to investors who plan to keep their investment for more than five years.
Cash investments range from day-to-day bank accounts to short-term money-market investments. Cash investments typically provide the lowest return over time and no scope for capital growth. However, they contribute to a well-balanced portfolio helping to reduce your overall risk and generally they allow easy access to money.
Fixed-interest investments mainly consist of tradeable government securities or corporate debt, known as 'bonds'. Regarded as a relatively low-risk investment, fixed-interest securities historically provide lower returns than shares and property. However, like cash investments, you can sell them quickly if you need money. They help reduce the overall risk of your portfolio and pay a regular interest income, which may be appealing.
Beyond the major asset classes, there are many investment opportunities, including:
- venture capital
- private equity
- emerging markets
- hedge funds
- tax efficient investments
- precious metals.
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