Proper asset allocation is one of the keys to driving investment returns.

There are 5 Asset Classes:

  • Cash: the safest asset class, with virtually zero short run return volatility, but with the lowest long-run expected return. Typical investments in this class include term deposits and cash accounts.

  • Fixed interest: returns are generally higher than for cash, though with greater volatility. Included in this asset class are government and corporate bonds, and fixed interest funds that invest in these securities. While the asset class is called 'fixed interest' it can also include securities where the interest rates vary in line with market changes in interest rates. Where the security has a fixed rate, uncertainty about returns occurs because of changing interest rates. The relationship between the direction of interest rates and the value of securities is counterintuitive. When interest rates rise, the value of fixed interest securities will fall. Conversely, falling interest rates increase the value of fixed interest securities. This unusual relationship is driven by the relativities between the rate payable on the security and market interest rates. Further, investment in corporate bonds also brings credit risk – that is, the risk that the borrower may not repay the principal you invest.

  • Property: returns are generally higher than for fixed interest securities because investors get rental yields plus the opportunity for capital growth through rising property values. Risks, however, are also higher because property values can fluctuate in line with the economy and interest rates, Property is also not a particularly liquid asset. Investments can be held directly or indirectly through listed or unlisted property investment funds.

  • Domestic Shares: further up the risk and return spectrum than property, this asset class gives investors exposure to Australian company shares held directly or indirectly through listed or unlisted share funds.

  • International Shares: although the longer-run returns and risks are not that different from domestic shares, international shares are typically treated as a riskier asset class because investors may be taking on currency risk. But, as Australia represents about 2% of the value of world share markets, international shares provide greater diversification.

  • Commodities: this class includes gold and other precious metals, iron ore, oil, or agricultural commodities such as wheat or corn. Returns are achieved when the price of the commodity increases. Prices tend to be more volatile than other asset classes.
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