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.
#2. Defensive vs Growth Assets
The main asset classes can be separated into two broad groups – defensive and growth investments.
Cash and fixed interest
Defensive investments, such as cash and fixed interest aim to provide investors with regular income at relatively low risk. They generally experience only slight fluctuations in investment returns and values over short periods. The downside of this security is that defensive investments do not usually grow in capital value and returns are generally lower than those of growth investments over the medium to long term.
Property and shares
Property and shares are usually classified as growth investments. As well as income, growth investments aim to increase the value of the capital invested. While investment returns are expected to fluctuate over the short term with market movements and economic changes, growth investments have the potential to produce higher returns than defensive investments over the long term.
Alternatives assets fall outside the four traditional asset classes and include commodities (e.g. precious metals), currency, private equity and some forms of infrastructure (e.g. public utility assets). Alternatives are included in the growth allocation as they can have very high levels of capital volatility in the short term and generally do not provide high or consistent levels of income. Alternative investments can produce different returns to both defensive and growth assets at different points in the market cycle.
Investment Fundamentals #3: Risk vs Return
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