People use very big words such as asset classes and investment vehicles – and if you’re lucky, even words like financial instruments! I like to refer to these as money machines. They are designed so that you can put money in and receive more money out.
Let’s break these money machines down into simple terms with a quick overview, and then get into some examples and breakdowns.
If you want to get into the examples, please scroll past this section! If you like some minor technicalities, then here are some definitions:
An asset is briefly defined as something that gives you money. For example, stocks give you money through appreciation and dividends.
An asset class is a grouping of investments that behave similarly. For example, when you put money in the stock market and buy a share of a company (or companies), the behaviour, cash flow, ups and downs tend to be similar. They are therefore grouped into an asset class.
An investment vehicle is something (sometimes called a product) that is used by an investor to make more money than what they did. For example, an EFT is an investment vehicle used to invest in stocks and/or other asset classes.
A financial instrument is a contract between two parties. This contract means that one side has an asset, the other a liability (or debt). Examples of these are a 32 day notice account, ETFs and funds.
The big four asset classes
It’s generally believed that there are four big asset classes. This is cool, as we don’t have to put too many different definitions and big words into our brains.
Let’s jump in:
Real estate as an asset class could come in many forms, but in general is classified as bricks and mortar. These could be zoned as residential, industrial or commercial.
Property assets are often rented out, yet other strategies do exist. Some people just keep properties like their beach holiday homes that appreciate in value.
Here are some articles to help you along your journey!
When investing in stocks, you are buying a share in a real company. This company’s shares are normally traded on a public exchange (such as the Johannesburg Stock Exchange – JSE).
This asset can make you money in two ways: If the company grows in value, your share in the company becomes more valuable. If you sell your share, you will make money. On the other hand, if you keep your share and the company makes a profit, it might decide to pay out a piece of the profit. This is called a dividend.
If you would like to invest in stocks, you are able to do so via a broker or financial advisor. Something that I prefer is using a company called EasyEquities. You can pick the stocks and buy a fraction of a stock, as some of the share prices are quite high (you can join them here)!
Bonds sound a lot more complicated than what they are. Sometimes companies need money to grow. They would then borrow this money from normal people like me and you, and promise to repay this money with interest. These are often long term debts, but fortunately interest is paid out every 6 or 12 months in most cases. Even governments sometimes need to borrow money!
It’s worth noting that if a company declares bankruptcy, the bond holders will get paid before the shareholders do. Interest on bonds are also often just above inflation, making it a very low risk, low return on investment.
Here are some articles to help you on along your journey:
If you would like to invest in bonds, you are able to do so via a broker or financial advisor. Something that I prefer is using a company called EasyEquities. In general, you would buy into a fund or ETF that invest in bonds. If you want to invest in government bonds, you can check out their website here.
Cash or equivalents
Cash! Yes, it’s the cold hard coin that you can invest in! Cash or equivalents are an asset class that you can quickly exchange for cash – i.e. is extremely liquid. Some examples of these would be a notice account of less than 6 months, money market accounts, gold or even foreign currency.
Cash or equivalents is notorious for having low risk and low returns.
If you would like to invest in cash or equivalents, you can speak to your local bank. They will give you options for investing in a money market or short term notice account.
Other asset classes / Investment vehicles
I want to add a section here, because it’s not 100% clear that these are asset classes, so I will add examples and details about other goodies.
Some people replace real estate with alternative asset classes. These are different assets that you buy, hold and sell them for a profit in due time. Alternative assets include:
- Investing in art,
- Collecting banknotes (numismatics),
- Commodities – investing in gold, platinum, rhodium
- Stamps (philately)
Speculative assets and speculation
As a special section I would like to highlight that some asset classes are speculative. We have no proof that these will generate money. We throw money at them with the hope that they will generate massive returns – sometimes to our downfall.
It is wise not to have too much money in speculative assets, as these might end up being worthless.
Examples of speculation and speculative stocks include:
- Forex and active stock trading
- Pyramid schemes and multilevel marketing schemes
Though some of the above might be profitable in the short run, they are often not sustainable in the long run.
Diversification is in fact a “free lunch.”
That is, it offers benefits without any cost.
– Peter Bernstein’s Against the Gods
No asset class is foolproof, and it might happen that one falls, and another rises. It therefore makes sense to diversify our portfolio (what we have in our investment basket).
Diversification – not having all our eggs in one basket – will help not to die of hunger if we invested our life savings in Bitcoin.
The four major asset classes are property, stocks, bonds and cash or equivalents.
In different economic times, they can behave differently.
When we diversify into all of these, it can help us to not lose all our money.