Assets

When we talk about assets, we are talking about any resources that act as stores of value or can be converted into money. While assets come in many forms, not all assets are created equal. Some assets, like property, can appreciate over time while others, like cars, depreciate. Assets like shares can generate growth and income above inflation while others, like cash, tend to become less valuable over time.

Assets can range from tangible instruments such as physical currency, property, land, machinery and infrastructure; to intangible assets such shares, copyrights and patents.

You can read more about the various types of assets here.

How are they structured?

Assets are commonly grouped together in categories, based on shared attributes such as the way they are regulated.

There are five main types of asset classes for investors.

Bonds

These are a form of corporate debt and are thought of as a legally enforceable ‘IOU’. They are used by entities to finance key projects or initiatives. These can be set at a fixed rate and can be publicly traded, through broker networks, or through private exchange. Bonds mature over time with pre-agreed interest payments made monthly, quarterly or annually.

These are considered to be a relatively safe, long-term asset. However, the credit quality should be considered as this is representative of the risk of default. Ratings agencies such as Moody’s and Fitch will offer ratings to bonds based on their quality, with A++ being the top rating, and anything below a B representing higher risk.

Cash

This is the physical currency you have in your purse or locked away in your savings or investment accounts. It is considered risk free. However, cash holdings are vulnerable to erosion due to rising rates of inflation. If you have £1,000 in cash and inflation rises by 10 per cent per year, that means that your £1,000 will only have the spending power of £900 after a year has passed.

Investors can reduce the risk of inflation by making use of tax-free wrappers, keeping cash savings in notice accounts, where the returns are typically higher, but you can’t access your cash instantly or by ensuring that savings earmarked for use in the short-term is in cash and the rest is put to work in investment accounts.

Commodities

These are the goods and materials that support the global economy. These include raw materials such as metals, chemicals, oils and gases, through to crops, seeds, and food. Commodities are affected by the rules of supply and demand, so their value will rise during times of scarcity. This means that commodities can prove to be high risk and subject to price fluctuations and inflation. These risks can be managed by keeping a diversified commodity portfolio, and by learning as much as possible about your chosen commodities to make more informed judgements about their future performance.

Experienced investors can also use their market insight to buy ‘futures’, or investment notes which assign a predicted value to a particular commodity. Futures investors aim to lock in a low price at the point of purchase in the hope that the commodity will rise in value so that they can make a profit.

Property

Property investments run the gamut from your primary home, to a buy-to-let investment property, to an off-spec development project. Property investments are considered to be a traditional, inflation-beating investment. However, it’s all about timing. Property prices tend to increase over time, but the Global Financial Crisis taught us that the bottom can fall out of the market very quickly under the right circumstances. Before investing in any property, it is important to understand the market and to time your investment during a relative dip in property values. Property bubbles have a habit of encouraging mania among would-be investors, who scramble to buy housing without doing property due diligence, and help to inflate property prices above their actual value.

Avoid rushing into a major financial decision. Properties are not liquid investments – even if you sell a property on the day of the listing, you will still have to wait for a couple of months for all the legal issues to be tied up before any cash is received.

Indirect property investments have become increasingly popular in recent years, as younger investors seek access to the property market without having to buy their own place. You can invest in real estate investment trusts (or REITs), listed property development companies, property loans, and crowdfunded property developments as an alternative to buying a bricks and mortar house.

Stocks and shares

One of the most popular asset classes, stocks and shares can be bought for as little as a penny. Each stock or share represents your ownership of part of a company. When the company does well, the stock price will rise; and when the company does poorly, the stock value will fall. As a stocks and shares investor, your aim is to choose companies with a good outlook, which are likely to perform well, making your share of the business rise in value.

Some companies offer dividends - or quarterly payments of interest – to keep investors engaged, or to reward their loyalty.

Stocks and shares for the backbones of almost all portfolios and a diversified, risk-adjusted portfolio can help to deliver inflation-beating returns. But remember, with increased returns comes accelerated risk. Companies can be poorly managed, fail to manage success or failure, or struggle for reasons that are completely out of their control.