Investment Fundamentals #1:
Understanding Asset Classes

If you’re just starting out as an investor, there’s a lot of information to absorb. In this series of articles we will define and explore the fundamentals of investing.

#1 Understanding Asset Classes

Most investments fit into one of four main categories or asset classes:

1. Cash

Cash includes money in bank accounts, as well as investments in bank bills and similar securities and some short term (up to 12 months) term deposits. Cash investments provide stable, lowrisk income in the form of regular interest payments. 

Time horizon: short term
 

2. Fixed interest

Fixed interest investments include term deposits, debentures, mortgages, and government and corporate bonds. The income return is usually in the form of regular interest payments for an agreed period of time. For fixed interest investments that are tradable (e.g. bonds), there is the potential for capital growth or decline depending on interest rate movements. 

Time horizon: one to three years
 

3. Property

You can invest in property directly (e.g. when you buy a house or commercial premises such as a shop or office) or indirectly (e.g. by purchasing units in a property trust that is listed on a stock exchange). This asset class includes residential, commercial, retail, hotel and industrial property. 

Time horizon: three to five years (medium term)
 

4. Shares

A share represents part ownership of a company. Shares are generally bought and sold on a stock exchange. Returns usually include capital growth as well as income from dividends. You can choose to invest in Australian shares, global shares or a mix of both. 

Time horizon: five to seven years (long term)

 

NEXT WEEK: 
Investment Fundamentals #2: Defensive vs Growth Assets


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