Shares, property, fixed interest, cash: what assets can you invest in and what's the right mix?
There are four types of asset classes that most people invest in and each has a different level of risk associated with it.
As a general rule, more risk comes with the opportunity for greater returns, but also with a greater chance of loss.
Your investment timeframe is likely to have an impact on the assets you choose. If you’re investing for the long term, taking on more risk and riding out dips in the market has the potential to deliver greater growth. But if you need your money sooner, a lower-risk strategy can help protect your investment from market fluctuations.
Determining your level of comfort with risk is up to you. One way that people manage risk is to diversify across asset types. Diversification of assets involves having funds in at least two asset types. You can also diversify within an asset class, buying both local and international shares for example, or shares in different industries.
Here are the four main asset classes and associated risks and rewards.
Cash is generally considered to be a low-risk form of investing. You can put your cash into an account, usually a term deposit or other high-interest account and earn interest on your money.
It is considered a low-risk option as your capital – the money you put into the account – may be government guaranteed. This means the amount guaranteed cannot be lost.
The trade off in low risk investment. You'll often get lower returns when compared with other asset types or even inflation.
With fixed-interest securities, you are essentially lending funds to another party that needs them now, with the funds to be returned at a later date.
You are paid interest (at a rate that’s usually higher than cash investments) at specified times throughout the borrowing period. When the time is up your funds are usually returned with a final interest payment.
You can’t usually invest directly into a fixed-interest security as a substantial sum usually needs to be lent. For everyday investors you can invest in fixed-interest securities through managed funds or in exchange traded funds (ETFs) that track a specific bundle of securities.
Fixed interest is generally regarded as a lower-risk asset class than shares or property. This is because, usually, depending on the security invested in, your capital (i.e. your original funds) will be returned to you.
The risk of loss may be indicated by the rating of the security (or the company that the security is issued by): the higher the rating the lower the anticipated risk of loss.
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You can own property directly or you can invest through a listed property fund. Property offers the potential for both capital growth and rental income.
It is viewed as a higher-risk asset than cash or fixed-interest securities due to the tendency of property prices to fluctuate. Similar to shares, listed property can experience both highs and lows.
With shares you buy an ownership share in an Australian or international company.
Shares offer the potential for higher returns than other asset classes. They can provide both capital growth through share-price rises and dividends as a regular source of income.
However, shares can experience both highs and lows and you can lose some or all of your capital invested. Shares are most commonly used as a long-term strategy.