Managing your assets is no longer exclusive to the well connected; it is a practice that anyone can use to build a brighter future. The three primary asset classes include equities, fixed income and cash equivalents, and there are those who would argue that real estate and commodities slip neatly into a fourth asset class.
These classes all have their own pros and cons and deliver varying results. Each class is also suited to different personality types and budgets, so any investment can be tailored to suit the needs of the investor. However, all asset classes are affected by the volatility of the market and, before anyone invests, they must be aware of the risks.
According to Emil Trautman, financial and investment advisor: "In long investment cycles (10 years), one asset class will always do better than another. Some are very volatile, like equities, while cash and bonds tend to be very stable. If you mix asset classes properly, then you will have a good and gradual growth over your investment term."
Investment is never clear-cut; there is no perfect way to increase the value of your investment and reap financial rewards. It is a tool and, as such, must be used with precision and market insight to achieve the right results and protect against the wrong ones.
Conray Labuschagne of Work Your Wealth says: "Investors need to understand that there will be ups and downs in every market, hence the need to diversify and seek alternatives that will suit their situations. They should explore different asset classes and income tools to make an informed decision."
Pros and cons of the classes
What do the different classes mean; why are they of value to the investor? Let's start with equities, one of the more common forms of asset that gets lot of publicity. The goal of equity investment is to make money through managing shares on the stock market. It's volatile, interesting and a little nerve-wracking.
Of course, there are different levels of investment, and they can be attuned to the investor's available capital and how much risk they are prepared to take with their investment.
Equities are a high-risk investment, but they offer the potential of high reward. The fixed income class, on the other hand, is considered far safer than that of equities, but has some shortcomings.
Commonly known as bonds or money market securities, fixed income investments deliver a below inflationary return and are not very liquid investments. They may also experience some volatility due to trading in secondary markets. The advantages to fixed income investments, however, are that funds are less likely to lose value and they are seen as "safe" for most nervous investors.
The third asset class of cash equivalents has the least amount of risk for the investor because it places funds into savings accounts that have varying levels of interest.
It offers an incredibly low rate of interest that doesn't match the market at all and offers no real return on investment. And the latter is what's important when reaching the end of an investment and looking to how much has been earned over the years. While a negative real return yields funds, it won't reflect the changes in the market and the potential that could have been. The fourth asset class is real estate and commodities, and this market has its own ups, downs and stagnations.
Tony Corriea, director at RepoProperty says: "Property investments can be a wonderful tool when used correctly, providing capital growth and monthly returns, but very few asset classes can produce both these benefits."
This asset class can be used to enter the buy-to-let market, for example, which offers the investor some steady returns and a future income However, the market can drop at a whim, leaving investors with high mortgages and low rents, among other things. The important thing is to be prepared for any eventuality.
"The primary objective of investing is to grow money in real terms, which means to protect the buying power of your money over time," says Wynand Gouws, head of marketing and retail at Old Mutual Investment Group South Africa. "Inflation erodes a currency's buying power, so R100 today will only be worth R50 in 12 years' time. People save for many reasons, and arguably the most important is to ensure a comfortable retirement."
Make use of the experts
When considering an investment into any asset class, taking advice from an asset manager or financial advisor is highly recommended. Their experience, expertise and access to a variety of markets and portfolios, not to mention packages and solutions, give the investor far more scope.
"When deciding to invest in anything, it is always better to consult a specialist," says Trautman. "The best investment portfolios are well balanced between all the asset classes and aligned to your own risk appetite."
Labuschagne says that problems arise when investors don't have knowledge of the market trends and risks.
"This simply cannot be emphasised enough. Adequate knowledge and skills go way beyond reading a book on the subject. Investors that know and understand the market will be able to choose the right assets," he says.
A professional is able to accurately assess your risk profile and tailor your investments. In spite of the risks associated with investing into asset classes such as equities, bonds and property, the rewards can potentially offer financial security well into retirement.
"Asset managers have dedicated investment teams that are focused on the investment markets," says Gouws. "They develop a very clear framework of their investment philosophy and, as an investor, all you have to do is select an investment product and leave the professionals to focus on what they do well, which is managing your investments."
The expertise offered by asset managers is invaluable when determining where to place your hard-earned money.
When an investment goes bad
"Those who feel the pinch due to ill-informed investment decisions should not prolong their pain," suggests Corriea. "In many instances it is best to take the knock, release capital and re-invest in the right opportunity as soon as possible. This way they can recover quickly and achieve profits rather than shortfalls."
Easy to say, not so easy to do. When your funds are tied up in a buy-to-let that just won't let, or the market has dragged your shares so low you can use them as carpets, it's hard to wave goodbye to the money and take the hit. However, it is a part of the challenge associated with asset management and often the risk is worth the reward.
"Start early, save enough and ensure to get professional financial advice to help you secure your future dreams and aspirations," concludes Gouws.
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