MyMoney Online

Investing 101: What does “asset class” mean?

(Also read the following related article: "New book teaches the uninformed and intimidated about money and how to grow it")

There are four main asset classes:

Each of these can be either local or foreign.

Different asset classes have varying levels of risk and expected returns. It is important to accept the direct relationship between risk and return; the more risk an investor is willing to take, the higher her expected return will be.

Cash (very low risk, very low returns, very liquid)

A money market fund refers to a fund that invests in “cash” instruments.

It is the least risky and most liquid (i.e. you can “get” your money at a very short notice) asset class over the short term.

While the yield or “interest” on a money market fund is generally higher than that offered by a normal bank account it is still, in many cases, lower than the rate of inflation. This means that an investor who invests all their capital in the money market can expect a negative real (i.e. when taking inflation into account) return.

So, while the money market is an ideal place to keep funds safe over the short term, it is far from ideal for purposes of generating inflation beating returns over the long term.

Fund managers will often incorporate the money market to reduce the overall risk of a fund.

Bonds (low risk, low returns)

Bonds are instruments that governments and companies use to borrow money from investors.

Bonds are also interest bearing instruments.

Over the short term, bonds are less risky than equity and property, but slightly more risky than money market instruments.

Bonds are also frequently used by fund managers to reduce the overall risk of a fund.

For the purpose of long term inflation beating returns, bonds are also not ideal. It is much more suited as a method to preserve capital (i.e. it’s good for keeping the value of your investments safe while not really growing it that much).

In an upcoming article we will look at property and equity as the two other main asset class types and the ones you want to invest in if you want to grow your wealth and comfortably beat inflation.

Claude Hannah is a financial planner for Venn-Sure Consulting. He completed a degree in Financial Risk Management from the University of Stellenbosch in 2006 as well as a post graduate diploma in Financial Planning. Claude helps to organise and simplify the often complicated and busy financial lives of his clients. He takes great pride in providing the highest level of service to help his clients build and protect their wealth. For more information, email him (claude.hannah@liblink.co.za) to arrange for a free consultation.

(Also read the following related article: "New book teaches the uninformed and intimidated about money and how to grow it")


This article first appeared on 702 : Investing 101: What does “asset class” mean?


Recommended

by NEWSROOM AI

CapeTalk welcomes all comments that are constructive, contribute to discussions in a meaningful manner and take stories forward.

However, we will NOT condone the following:

  • Racism (including offensive comments based on ethnicity and nationality)
  • Sexism
  • Homophobia
  • Religious intolerance
  • Cyber bullying
  • Hate speech
  • Derogatory language
  • Comments inciting violence.

We ask that your comments remain relevant to the articles they appear on and do not include general banter or conversation as this dilutes the effectiveness of the comments section.

We strive to make the CapeTalk community a safe and welcoming space for all.

CapeTalk reserves the right to: 1) remove any comments that do not follow the above guidelines; and, 2) ban users who repeatedly infringe the rules.

Should you find any comments upsetting or offensive you can also flag them and we will assess it against our guidelines.

CapeTalk is constantly reviewing its comments policy in order to create an environment conducive to constructive conversations.

Read More
It costs peanuts to insure your most valuable asset

It costs peanuts to insure your most valuable asset

Your most valuable asset – your ability to earn an income – is worth 10 times more than your house, yet it’s very cheap to insure.

Can’t (or won’t) buy to let? Don’t sweat; there’s a far more lucrative option

Can’t (or won’t) buy to let? Don’t sweat; there’s a far more lucrative option

Financial planner Claude Hannah compares the costs, risks and returns of property unit trusts to that of buy-to-let properties.

Why medical aid is woefully inadequate (and how affordable gap cover helps)

Why medical aid is woefully inadequate (and how affordable gap cover helps)

It may come as a shock (but it’s all there in the small print); medical schemes do not fully cover you when you’re hospitalised.

Savers rejoice! South Africa gets tax-free savings accounts on 1 March 2015

Savers rejoice! South Africa gets tax-free savings accounts on 1 March 2015

Savers rejoice! On 1 March 2015 government introduces tax free savings accounts. Financial planner Claude Hannah explains…

How much you should save for retirement

How much you should save for retirement

You know you should save for retirement, but do you know how much? Financial planner Claude Hannah breaks it down in simple terms.

Popular articles
Can you 'affair-proof' your marriage?

Can you 'affair-proof' your marriage?

Sexologist Nikki Goldstein says there are steps you can take to cut the risk of infidelity in your relationship.

Stadium riot: 'It's just inexplicable and unacceptable by all means'

Stadium riot: 'It's just inexplicable and unacceptable by all means'

Minister of Sports and Recreation condemns this weekend's violence by Kaiser Chiefs fans.

'He raped me every day for a year when I was 8 years old'

'He raped me every day for a year when I was 8 years old'

A woman has penned her triumphant story of survival after being sexually abused by an uncle as a child.

Euphonik (one of South Africa's top DJs) opens up about money

Euphonik (one of South Africa's top DJs) opens up about money

Bruce Whitfield talks to Euphonik (aka Themba Nkosi) about his attitude to money (hopes and fears, successes and failures, etc.)

This is how much you should be paying your domestic worker

This is how much you should be paying your domestic worker

Stephen Rathai, director of employment standards at the Department of Labour talks on the new national minimum wage.

Madiba’s private secretary Zelda la Grange opens up about money (hers and his)

Madiba’s private secretary Zelda la Grange opens up about money (hers and his)

Bruce Whitfield interviews La Grange about her and Madiba's attitude to money (hopes and fears, successes and failures, etc.)

Mugg & Bean agrees to pay medical bill of customer

Mugg & Bean agrees to pay medical bill of customer

Mugg & Bean has agreed to pay for customers medical bills after a month of being in pain and pestering the chain to pay the bill.