What are Asset Classes?
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One of the first investment decisions that you will need to consider is “What do I invest in?”
Asset classes are like a fruit bowl, each containing different types of fruit representing various investment options, ranging from stable and reliable apples and oranges (like fixed interest and bonds), to more exotic and potentially higher-risk fruits like kiwis and dragon fruits (such as commodities and alternative investments). And everything in between.

When you invest, you buy assets. The intention is that these assets can do two things. They are: 1. Produce income; and/or 2. Grow in value There are different types of assets. These different types of assets have been grouped into asset classes. The major asset classes
Income Assets |
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Growth Assets |
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Income & Growth Assets |
Cash and Cash Management Trusts Term deposits Mortgages Government Bonds Corporate Bonds
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Gold Silver Collectibles (art, motor vehicles, etc) |
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Shares Property |
Before we move on, a quick word about volatility. Volatility is often associated with the risk of an investment. Volatility is a measure of how much the value of an investment rises and falls.
Firstly, let’s consider those asset classes that produce income only. They demonstrate low volatility and include cash, bank deposits, mortgage investments and bonds. When you invest in income-only assets you receive income that is added to your taxable income for that financial year.
Cash and cash equivalent investments such as term deposits and cash management trusts are low volatility and low risk. With mortgage investments your money is placed in an account such as a mortgage trust with money from other investors. These collective funds are then loaned to a borrower to invest in property or property development. The borrower pays interest which is received by the trust and passed to the investor. After a defined term the borrower repays the capital. Mortgage investments are considered more volatile because if the borrower defaults then the investor’s capital may not be repaid.
Two common types of bonds are government bonds and corporate bonds. To invest in bonds it is common to do so via a collective investment vehicle such as a managed fund or Exchange Traded Fund (ETF). When you invest in a bond you are effectively lending money to the bond issuer. The bond issuer promises to pay a fixed or variable rate of interest for a fixed term. At the maturity of the term the bond issuer promises to repay your capital in full. Government bonds are generally a secure investment in countries such as Australia that have a stable economy. Corporate bonds are issued by large companies that are listed on the stock exchange and are considered more volatile than government bonds. Corporate bonds offer a higher rate of interest than government bonds. While bonds are included as income-producing assets it is important to consider that they can also rise and fall in value if not held for the full term to maturity.
Secondly, there are growth-only assets. These rise and fall (hopefully rise) in value but produce no income, such as gold bullion, works of art and other collectibles. Investors who choose to buy gold can either invest directly and purchase physical gold, or invest in a collective investment that holds the asset. Other collectibles are generally held as a physical asset.
Finally, there are assets that demonstrate both growth and income. Included are property and shares. This is where it gets a bit more complex. But don’t stop reading now … it’s not that difficult.
Australians have a long and profitable love of property. Both small and large fortunes have been made by investing in property. There have also been losses … no investment is without risk. And when we think of property we tend to think of residential property.
A property investor is wanting to get income via rental payments and also growth in the value of the property.
The value of Australian houses has risen and declined through a series of cycles for the 30 year period 1992 - 2022. The overall result is strong growth with a total increase of 382%. This equates to an average compounding return of 5.4% per annum (Core Logic 2022). Investors have generally been in for the long haul with an average ownership of 9 years between the acquisition and sale of the property.
The property asset class also includes commercial property. Included here are industrial properties, office buildings large and small, retail centres such as shopping centres, hotels and other leisure-based property such as caravan parks.
There are two ways to invest in property. They are:
1. Direct ownership where you hold the title deed and own the property in your name; and
2. Indirect ownership where you, and many other investors, invest in a collective investment vehicle that is professionally managed.
Each has its own benefits and disadvantages. Direct ownership conveys absolute control over the asset including location, decisions regarding any improvements, choice of tenants, ability to review the rent and the timing of the sale. You are the single beneficiary of the income and growth of the property.
On the downside, direct ownership of property means that you have a very large amount of money, often over $1 million invested in a single asset. That is, all of your eggs in one basket. If it is profitable then you receive all of the profit. However if it not, then you take all of the losses. Put simply, you have no diversification.
Indirect ownership is generally via a collective investment vehicle with many other investors. Included are managed funds, ETF’s and AREITS (Australian Real Estate Investment Trusts) that are listed on the stock exchange. Such investments are professionally managed. Indirect ownership has the benefits of diversification with investors effectively being a part owner of a number of properties in different locations and often with different uses. Further, only a comparatively small amount of money, often $5,000 or less, is required to become an investor. The disadvantages are lack of control and the cost of professional management.
Shares are also called stocks or equities. All companies are owned by shareholders who hold shares. The shares discussed here are only in companies that are listed on the stock exchange (ASX). The stock exchange is where shares are bought and sold. This asset class, like property, is comprised of sub-classes. One method is to divide the companies on the ASX into industrials and mining stocks. Another is to distinguish the companies by their size into large-cap, mid-cap and small-cap (“Cap” means capitalisation which the total value of all the shares of a company added together).
The value of shares rises and falls as buyers and sellers interact on the stock exchange. Investors receive income when a company they have invested in makes a profit and issues a dividend. This usually occurs twice each year. The value of the shares generally increases as the company profit grows and also when the demand for its shares grows.
In summary and in keeping with the fruit analogy, asset classes are akin to a fruit basket: stocks are the ripe, adventurous mangoes, bonds are the dependable, steady apples, and real estate is the solid, enduring pineapple, each offering a unique flavour of risk and reward.
Check out my Money Makeover Course, this topic and much more is covered in Money IQ element of the course in Modules 2 and 3. These two modules bring you up to speed with your financial literacy and money competence.
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