Jonathan Cattana explains asset classes
- May 31st, 2010
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Jonathan Cattana explains asset classes
What are asset classes?
The following are investment basics. At the very minimum you should aim to understand the four asset classes and be able to explain them to someone else. The principles of asset classes are very important and will not only prepare you for your approach to saving for private school fees, but also for any other lifetime financial goals you may be aiming for.
There are only four asset classes and they are:
• cash
• fixed interest
• property
• shares.
Cash This is a simple as it gets. Cash assets include any salary or wages you may receive and deposits in the bank or products like cash management trusts. Cash is the most dangerous to be in if you stay invested here for too long when you have longer-term goals. The only reason you would have cash sitting in a bank account is because you are about to buy another asset with it in the next 12 to 18 months.
With cash you can invest:
- in many forms
- directly or through a managed fund
- within Australia and overseas.
Fixed interest Fixed interest investments are mainly referred to as debt securities. This type of asset can be found in the form of government debt and bonds. Other fixed interest investments may sound familiar to you such as term deposits, corporate bonds, bank bills, inflation indexed bonds and debentures. These bonds and other debt instruments can be purchased locally as well invested internationally. With fixed interest you can invest:
- within Australia and overseas
- directly—though this may prove difficult—or through a managed fund.
Property We are all familiar with holding physical property such as owning your own home. This is referred to as holding direct property. You may also own other property such as an investment property.
You can hold property indirectly through a fund manager in the form of a listed property trust (LPT). LPTs can be purchased on the ASX (Australian Stock Exchange), or again managed by a fund manager. Over the past few years, interest and returns in this asset class has exploded and, more recently, Australian fund managers are looking to invest offshore. With property you can invest:
- directly or through a managed fund
- within Australia and overseas.
Shares When you buy shares, you are buying a piece of a company and become a part-owner of that business or a ‘shareholder’ of that company. By being a shareholder of a listed company you are in fact participating in the performance and profits of that company. You can find companies listed on the ASX in any major newspaper.
You may be familiar with listed companies with household names such as Woolworths, the Commonwealth Bank or BHP. Australia represents only a fraction of the total share markets in the world. International shares are a popular asset class. Some examples of international companies are General Electric or IBM in the United States. In this book we are referring to listed shares on any given stock exchange around the globe. You can buy shares within Australia and on overseas share markets. You can invest in shares in two ways:
- directly, that is buying shares on the ASX through a broker
- through a managed fund.
The only consistency between these asset classes above is this: They all perform differently at different times so they all have varying levels of income, they all have their own risks, (yes even cash!) and their price may rise and fall in value.
When you are reading other financial papers or magazines you may see reference to schemes such as tree and almond plantations that are referred to as another asset class. This is not correct, the majority of these schemes are tax driven. There are only four asset classes and I’ve outlined them above. I have always been wary about investment schemes that promote anything that sleeps, eats, grows or walks!