If you spread your money across different asset classes (a term used to describe different kinds of investments), then the risk of losing money is reduced.
This will give you what’s known as a property portfolio, which helps to protect your overall investment.
What are the different asset classes?
These are the main asset classes, across which you can spread your investment. Property is one of the most important asset classes, but here are the others, so that you can understand the difference. Asset class:
PROPERTY
This covers everything from residential or commercial to buy-to-let, as well as investment in everything discussed so far, including property companies or funds.
The risks of this asset class include volatile prices (when compared with bonds), the potential for gains but also for losses. You can’t necessarily access your money fast if you have invested directly.
Asset class: CASH
The simplest form of asset class, which most people utilise in some way, includes current accounts, savings accounts, savings bonds, premium bonds and other NS&I products, any cash you have at home and Cash ISAs.
The risks are low but your money loses value as time goes on, if inflation is higher than the interest rate you’re being paid. Authorised UK banks and building societies use the Financial Services Compensation which means your cash is protected up to £85,000.11
Asset class: FIXED INTEREST SECURITIES
Also known as bonds, these are basically fixed period government loans to a company, such as government bonds, overseas bonds, local authority bonds and corporate bonds.
The risks are relatively low and if you hold the bond until it matures, then the returns are predictable, making it a safe bet. Traded prices can, of course, be volatile and if inflation is higher than the interest rate paid on the bond then your money’s worth can be eroded.
Asset class: SHARES
These are stakes in a company, and are also called ‘equities’. You can either hold shares directly or through an investment fund, which collects money from a group of people. These can be called a unit trust, a life fund or an OEIC (open-ended investment company).
Investing in one company is always high risk, so it’s a better idea to invest in a fund as it provides more diversification. Risk levels will always depend on the type of shares in the fund.
Asset class: ALTERNATIVE INVESTMENTS
This includes investing in gold, antiques, wine and other investments that don’t fall into the main asset classes. It’s not possible to calculate the risk as it’s an unpredictable asset. It depends on the quality of the asset and the market at the time of investment.
Why diversify?
Each asset class works differently. So, if stock prices fall, the price of property might rise. If you have a mix of different investments in different asset classes in your portfolio, then there is a higher chance that you will be protected. You are minimising the risk that all your asset classes will lose value at the same time.
Diversifying within each asset class
There are many ways to diversify between asset classes, but also within a single asset class.
For example, with property, you can spread your investments between residential, commercial and buy-to-let.
How keen are you to take a financial risk?
Before you make an investment plan, you should find out how important it is for you to avoid losses. If it is very important to minimise losses, then it’s worth designing your portfolio accordingly.