Exploring Different Asset Classes And The Level Of Risks They Have

When looking at different investments, one thing you will be looking at is asset classes. 

If your investments are in the same asset class, they will usually share a similar level of risk, regulations, and return performance. If you compare different investments in different asset class categories, they will have differing levels of risks, returns, and more.

That said, if you’re new to investing, one thing you may be wondering is which asset classes pose more risks than others. To answer that question, this article will share what an asset class is, different types of asset classes for you to explore and the risk and return characteristics of each.

What is an Asset Class?

An asset class is considered a category of investments that betray similar characteristics in the marketplace. When you are making investments within a single asset class, you can expect the investment to:

1. Share similar risks and returns,
2. Subject to the same laws and regulations
3. Perform similarly in a particular market volatility
   
   

When you gain a basic understanding of what you can expect from each asset class, you can base your investment strategies around your financial needs, risk tolerance and investment timeframes.

4 Different Types of Asset Classes For You To Explore:

1. Cash Equivalents

Cash equivalents are pretty much exactly what it sounds like: cash. 

A cash investment is a short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments.

These are usually considered to be the safest kinds of investments – this is because you are lending your money to the government for a very short period of time with more or less guaranteed returns.

The problem is, that there is a very low return on cash investments. What this means is that, in the long run, this asset class may not be very profitable, but they also don’t pose much risk in the first place.

Essentially, if you want a way to keep your money extremely safe, this is the asset class to opt for as it’s lower risk. They’re generally stable as they are not affected by market movements, but they won’t be giving you many returns to grow your wealth.

2. Debt

Debt is the simplest form of asset class. It’s usually an investment made in a firm or project through the purchase of a large quantity of debt, with the expectation of that debt being paid back plus interest. It’s generally safe, as all you are investing in is the promise that, in the future, you will receive back your money with interest. Of course, this doesn’t mean it is risk-free. 

The only thing you may want to consider is the risk of interest rates or inflation severely increasing, as that has the potential to affect your overall wealth.

3. Real Estate

Real estate is one of the most widely-held assets. It can be considered a riskier investment than debt, but it can also be more profitable. If you’re investing in real estate that you intend to live in, it will tend to go up in value over the long term. Alternatively, you may consider it to be an income-generating investment and rent it out to earn rental income. 

The concern with real estate lies with the fact that it takes a fair bit of money to make a 20% deposit on a home and can be considered a high-risk investment depending on the current rental market, which can fluctuate.

If you buy a house needing a $100,000 deposit, you will have to invest a large amount of money. You may want to check the market risk of investing in property and the interest payments that will be attached to your home loan.

If the property market is booming you will find the capital growth on your property investment increases, or if interest rates fall you may consider refinancing and choose to put the extra money towards other investments.

When seeking investment advice from your trusted financial advisor, it may be worthwhile to ask if property investments are a suitable option for you.

4. Stocks

Stocks are also considered high-risk investments, as their returns are often subject to short-term market fluctuations and movements within the stock market. 

When you buy a stock, you’re basically paying a company to give you a stake in their business. That means that if the company does well and experiences company growth, you’ll be able to receive dividend payments (ie. returns!).

The problem is that if the company does poorly, you could receive low or negative returns on your investment. 

This is where a diversification strategy can lessen your investment risk – as when one asset class isn’t performing, your other investment assets depending on their risk level are providing you with stable returns.

This asset class is expected to pose different risks, as there are different stocks to invest in. It’s important to ensure your stock investments are aligned with your values and risk tolerance.

The primary advantage of investing in stocks include not needing as much money to get started and also allowing you to have flexibility over the choice of stocks.

Poole Advisory: Investment Advisers in Sydney and Bowral

When you’re investing, you need to look at the risks and rewards of each investment and understand the different asset classes so you can then determine which will work best for your needs. 

Each asset class poses a different risk and return, so it may be worthwhile to seek advice from an expert financial advisor who specialises in investment advice. They can help you create an investment portfolio tailored to your financial goals in life.

Poole Advisory is a boutique advisory firm offering a variety of financial services to help individuals make the most out of their finances. If you are looking for investment advice in Bowral or Sydney,

Get in touch with us today!