An Introduction to Asset Classes

An asset class is a group of investments that have similar financial characteristics. Different classes, or types, of investment assets – such as fixed-income investments – are grouped together based on having a similar financial structure. Typically, trades take place in the same financial markets and so they must follow the same rules and regulations.

Main Asset Classes

Traditionally, there are four main asset classes. These are:

  • Cash or cash equivalents, such as money market funds
  • Stocks and shares
  • Property or other tangible assets
  • Fixed-interest securities (also called bonds)

There are also other types of asset classes. However, most assets fall into one of the main classes. The proportion an investment that is put into each asset class is known as asset allocation.

Asset Class

Examples and comments

Risk profile

Cash

Savings and current account balances, savings bonds, premium bonds and other NS&I products, Cash ISAs. Low – but money’s buying power is eroded over time if inflation is higher than the interest rates paid. Cash put into authorised UK banks or building societies is protected by the Financial Services Compensation Scheme up to £85,000.

Fixed interest securities

also called bonds. Essentially a loan to a company or government for a fixed period.

Gilts (Government bonds), overseas bonds, local authority bonds and corporate bonds (loans to companies). Relatively low and returns predictable if held to maturity, however traded prices can be volatile. Money’s buying power can still be eroded over time if inflation is higher than the interest rate paid on the bond.

Shares

also known as ‘equities’. A stake in a company.

Shares can be held directly or through an investment fund where money is pooled with other people’s, like with a unit trust, OEIC (open-ended investment company) or life fund. Investing in a single company is high risk. Investing in a fund provides more diversification, but risk levels will depend on the type of shares in the fund.

Property

Includes residential or commercial property and buy-to-lets, and investments in property companies or funds. Price can vary and be more volatile than with bonds. Potential for gains but also losses. Investors might not be able to access capital quickly if they was invested into property directly. Access to capital might also be restricted through property funds.

Alternative investments

Includes gold, art, antiques, collectibles, fine wines and other investments that do not fall into the four main asset classes. Risk profile unpredictable – very much depends on prevailing (niche) market conditions and quality of asset.

Each kind of asset behaves differently. For example, when stock prices fall, the prices of fixed interest securities might go up.

If there is a mix of investments involved it will minimise the risk that they’ll all lose value at the same time.

Diversification in Asset Classes

Diversification in asset classes is spreading money between different kinds of investment and different kinds of investment product. This helps to reduce the risk of overall investments under-performing or losing money.

The key to diversifying – and successful investing in general – is to spread money across different kinds of investments.

There are also many opportunities for diversification, even within a single kind of investment. For example, with shares, investors can spread their investments between:

  • Large and small companies
  • The UK and overseas markets
  • Different sectors, for example the industrial, financial, and oil sectors

How We Can Help

Here at The Compensation Experts we work with solicitors who have years of experience dealing with financial mis-selling claims. This includes asset classes. If you need help with a potential claim, contact us today by filling in our contact form. Or call us to speak to one of our friendly knowledgeable agents.

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