The IC guide to asset classes
- Should you buy stocks, bonds or any other asset?
- Understanding the different asset classes can help you make better investment decisions
Choosing the right assets is considered one of the most important factors in determining the long-term results of investment portfolios.
Investors should spread their money across multiple asset classes in order to reduce the risk if one of the types of investment experiences tough times. Different assets tend not to work in sync with each other – when one asset is weak another may be performing well.
Our guide shows you the main asset classes.
Investing in stocks means buying a share in the ownership of companies and the profits they make. This can be done either by investing directly in specific companies or through funds, where the money of many investors is pooled and invested in several companies.
When you invest in stocks, you share in the success (or challenges) of that business. Your returns can come in the form of capital gains (an increase in the value of your stake) or income (some companies return excess profits to their shareholders in the form of dividends).
This asset class will deliver strong returns when times are good, but in a long bear market (a time when the trajectory of stock prices is down) your portfolio value may remain below its previous high. for a certain time.
Direct Equity Investment (investment in companies)
When you buy a share, you become a joint owner of the capital of a company. Selling stocks to investors is a way for companies to raise funds to finance their growth.
Any company can issue stock, but most investors only have easy access to stocks of companies listed on the stock exchange and generally referred to as “public” companies.
The funds pool the money of many investors which is collectively invested in several assets. They therefore allow investors to access a large number of stocks, which is important for diversification.
There are several options for selecting funds. Investment trusts or exchange-traded funds are closed-ended, which means that there is a specific number of stocks that investors can buy and, just like the companies they invest in, these stocks are listed in stock Exchange. Open funds can invest as much or as little as they want. They are not listed, but have clients on whose behalf the fund managers select specific investments.
Investors can also choose between actively managed or passive funds. In the former case, fund managers research and select investments, the latter simply follow the performance of an index and are therefore much cheaper.
You can find out more about specific types of funds in our different guides:
The IC Guide to Exchange Traded Funds
Our complete overview of the ultimate passive product
The IC Guide to Investment Trusts
Understand how these funds are structured and managed
Referring primarily to sovereign bonds (money borrowed by countries) and corporate bonds (money borrowed by companies), fixed income is so called because the borrower pays regular payments to bondholders.
These payments do not change during the life of the bond and when it matures, the bond holder also recovers their original investment. Bonds are traded among investors after they are issued, so part of bond fund returns are due to changes in bond prices in the secondary market.
Government bonds are a safe haven when stock markets sell off, in the past the increase in the price of the safest government bonds has offset losses to the stock market. Corporate bonds can also behave differently from stocks, which also balances the risk associated with stocks in the portfolio. Investors should be aware that these correlations could change and are unlikely to be as strong as they were in the past.
With interest rates so low, generating income from a portfolio is one of the great challenges for modern investors. Yields on safe government bonds range from negative to negligible in real terms (after inflation), meaning bond investors have been forced to invest in riskier corporate loans.
Moreover, the pitfalls of relying on stock dividends have been brutally exposed in the savage recession caused by lockdowns to fight the coronavirus. Unlike bond coupons, dividends paid to shareholders can be reduced, a fact painfully reminded by many investors this year.
You can learn more about investing for income in our comprehensive guide.
This category may include different types of assets, including real estate and commodities, or it may refer to subtypes of investing in stocks, including in unlisted companies.
Certain investments such as private equity (companies whose shares are not listed on the public markets), specialized real estate (such as warehouses used by large mail order services) or private infrastructure (such as toll roads or digital infrastructure in some countries) are only accessible to private investors by buying shares of investment companies on the stock exchange.
In addition to these investments in niche stocks, the âotherâ category will cover holdings of precious metals such as gold and silver; and could also include investments that track the price of other commodities, cryptocurrencies, or any other asset that people are speculating on.
Alternative investments are varied and often volatile, but they can produce periods of strong performance. In addition, they often behave differently from common stocks and bonds, which helps diversify risk.