The most common assets include stocks, bonds, reits, gold and property. As mentioned there are several Types of Stocks. There are also a variety of bonds – government bonds, municipal bonds, corporate bonds and foreign bonds. Reits are real estate investment trusts which are companies that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, and hotels. There are two main types of gold investment – physical gold that is tangible and needs to be kept safe, and gold investment via Exchange Traded Funds (ETFs). Property investment includes Buy to Let houses and apartments in addition to property investment funds. We shall go into these assets in detail in other posts.
With so many different assets, what should you invest in?
This essentially comes down to your investment goals. Many successful investors split their total investment into several assets, some of which may include those just mentioned. By doing so, they are aiming to diversify their holdings. Asset allocation is the term that describes this process. Your investment portfolio should diversify enough to fulfil your investment objectives with the level of risk that you feel most comfortable. Why diversify when the Dow Jones alone can potentially achieve your acceptable returns? The Dow Jones hasn’t always been the best investment every year, and it is comprised of equities – a shareholding of the top 30 companies in the US. Equities holds an element of risk that you may not be comfortable with if your investment time horizon was less than 5 or 10 years. There is a certain amount of volatility that you would need to accept. However, you may be able to achieve a similar return over the long run with LESS risk. This is important. By diversifying your investments you are reducing the risk in your portfolio. Optimal asset allocation strategies can maximise your returns while minimising your risk.
Investors should diversify their holdings because the greatest performing investment this year may not be the greatest performing next year. The winners tend to rotate. There is no clear pattern of rotation. If there was, everybody would be doing it. Have a look at the following illustration. We can see how various asset classes have performed.