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The four asset classes
An "asset" is something in which you invest to achieve growth on your money. An "asset class" is a category of financial assets.
There are four main asset classes generally available to investors :
Each of these asset classes is explained below.
Shares
Shares are also known as equities or stocks and can be bought directly (via a broker or online) or indirectly (through unit trusts or managed funds). When you buy a share, you effectively buy a part ownership in a company.
The price of shares can be influenced by different factors, including how a company performs over time and how the overall share market reacts to economic, social and political influences. All these aspects can positively or negatively impact the direction of share prices.
Over the short to medium term (ie up to ten years), shares have the potential to provide high levels of fluctuation in returns. However, shares generally provide the highest potential for growth on your money over long periods of time (ie ten years or more). For this reason, they are referred to as a "growth" asset.
Property
Property can be owned directly or indirectly. In investment terms, property refers more often to investments in "property securities" and generally excludes residential housing. Property securities are usually listed on the stock exchange and can include properties in the commercial, office, retail, industrial, entertainment, property mortgage and hotel sectors.
To achieve greater diversification, the Plan's Property option invests in both Australian and international property securities, as well as "infrastructure". Infrastructure is a general term to describe the facilities and services required by the community and for production. For example, transport (roads, airports, railways), power (gas and electricity generation), telecommunications and water supply are all types of infrastructure investments.
As with shares, an investment in property/infrastructure provides the potential for growth on your money over longer time periods. Therefore, this asset class is also considered to be a "growth" asset.
Fixed interest securities
Fixed interest securities include investments in debentures, bank bills and bonds and are commonly issued by government and semi-government bodies, banks and companies to pay for business projects. Fixed interest securities are essentially an agreement by the issuer to repay an amount of money at a future pre-determined date (ie the maturity date), as well as to make interest payments (ie coupons) to the holder throughout the period the security is held. When the maturity date is reached, the security can be redeemed for cash.
Fixed interest securities can be bought and sold, with the value of the security being linked to interest rates. If interest rates rise, the value of the security decreases. Conversely, if interest rates fall, then the value of the security increases. While fixed interest securities are generally considered less risky than shares and property, investors should understand that the value of an investment in this asset class can fall as well as rise. However, fixed interest securities tend to be less volatile in return than growth assets and are, therefore, known as a "defensive" asset .
Cash
Cash is usually considered to be the least risky of all of the asset classes. However, an investment in cash is traditionally also considered to offer the lowest return. Cash investments can include investments in a range of securities such as bank accounts and short term money markets. As there is a relatively low risk of losing the capital value of your initial investment - although not impossible - cash investments are also considered to be a "defensive" asset.
