Stocks, Shares Or Property? Understanding investment asset classes

7 October 2016

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IP Global Director Darren Mellis highlights five popular asset classes and how they contribute to building a solid investment portfolio in an uncertain economic climate.

1. Cash-based investments 

Cash deposits and fixed rate bonds from institutions.

These are interesting times for both seasoned investors and novices alike and cash-based investments are a case in point. Just over a year ago, the message from the Bank of England (BoE) and the Fed across the pond was that we should gear ourselves up for a step-by-step return to something resembling normality on the interest rates front. Fast forward to the present, and we appear to be heading in the opposite direction. Negative rates are already in place in the eurozone and can’t be ruled out as a possibility in the UK. 

At heart, most investors have a simple objective: steady capital growth and dependable, predictable income. There was a time when cash-based investments were valuable on both of these fronts, but not anymore. The chances of rates climbing to the BoE’s target range of around three to four percent in the medium term appear extremely slim.  

In this climate, even on so-called ‘high interest’ fixed rate bonds from banks, returns are always going to be disappointing where the rates set by individual institutions are linked to national central bank rates. The value of cash investments lies in their security, which means they can still form a useful part of an investment portfolio. However, for generating an income stream and for capital growth it’s necessary to look directly to the capital markets.

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2. Shares

Shares are medium or long-term investments that involve investing directly in your own hand-picked selection of companies, or having experts make your investment decisions through a fund or investment trust.

Performance of shares tends to fluctuate day-to-day and month-to-month, but historically, if you hang on to them, capital growth tends to outperform cash investments. There’s also the added incentive of a revenue stream through annual payments to shareholders, i.e. dividends.

If it’s predictability you are looking for, shares can – and frequently do – fall short. Let’s say you are invested in a fund that consists of a range of shares from one of the big indexes such as the FTSE 100 or S&P 500. You are expecting a ballpark amount in dividend payments this year, only to find that a number of the big names that the fund is exposed to – Rio Tinto, Shell and HSBC for instance – have had to slash their payments this year. Beware of over-reliance on share-based investments if a predictable revenue stream is a priority.

3. Commodities

A wide-ranging asset class covering precious metals such as gold and silver, industrials such as oil, gas and copper and ‘soft’ commodities - mostly raw foodstuffs.

Investing in precious metals, notably gold, can be a useful defensive strategy for your portfolio. The capital value of gold tends to increase or stay steady over the long term, and its performance is shielded from what is happening elsewhere on the markets. In short, you can use it as a hedging tool to preserve a portion of your capital from volatile markets.

For an inexperienced investor, direct involvement in the commodities market doesn’t tend to be a natural first port of call. For instance, with futures contracts on oil or copper, rather than taking on physical ownership of the commodity, you are essentially betting on the price either falling or rising. Commodities markets can be volatile and unpredictable, meaning that futures can give rise to big losses as well as potential gains.

4. Bonds

These are often described as ‘IOUs’ issued by investors. Bonds supplied by the government are referred to as ‘gilts’ while corporate bonds are distributed by large companies.

With this method of investing, you are essentially a creditor of the party who issued the bond. They offer you security of capital, unless you are extremely unlucky and the company in question goes bankrupt. They also offer you predictability, especially if you opt for bonds that offer a fixed annual return. But with a fixed income stream and much lower level of risk compared to the stock market comes a lower level of return compared to investment in shares.

5. Property

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Investing in property, and gaining an income stream from tenants, is considered to be removed from the volatility that exists elsewhere. The fundamentals that influence capital growth in property is only very loosely related to what is happening on the stock market.

Let’s take a hypothetical scenario. Another round of disappointing GDP figures from China causes the value of a number of the industrial shares in your investment fund to lose value and for those companies to cut their dividend forecast. Meanwhile, you also discover that the previously strong-performing tech stocks that you intended to sell this year have also lost value due to weaker than expected profit announcements. In this situation, you could be taking a hit across your portfolio. Property investments on the other hand, are ‘above the fray’. With well-chosen property investments, you have the potential to diversify your portfolio thereby reducing your risk profile, at the same time as potentially increasing your returns.

Supply and demand is a major driver of growth, especially in major hubs such as London and Manchester, Melbourne and Brisbane. Yet success is not guaranteed. Each potential investment must be considered on its own merits, local knowledge is also vital, and a targeted approach is needed from experts in the market.

Find out more about building your property portfolio to shield your position from strong headwinds by downloading our Investor Guides.


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This article was first published in The Expat.


 

Written by Darren Mellis

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