When you invest money there are really 3 broad categories of assets that you can own. Shares, Property, and Cash & Fixed Interest. If you understand how these assets classes operate on their own, and how they interact together, it will make it easier for you to understand how you should put together your investment portfolio.
When you invest money there are really 3 broad categories of assets that you can own. Shares, Property, and Cash & Fixed Interest. If you understand how these assets classes operate on their own, and how they interact together, it will make it easier for you to understand how you should put together your investment portfolio.
Bank Cash investments including Term Deposits offer stability and security of capital with interest paid at current rates.
Government and Company Bonds are cash like investments that provide a return of your capital at the end of the investment term, regular interest income, however they do fluctuate in capital value along the way depending on changes in interest rates.
Cash and Bonds are known as Defensive Assets.
Shares and Property provide returns in 2 different ways. They provide income in the form of dividends from shares and rental from property. They also provide potential for capital growth – if you buy quality shares or property then you expect that their price will increase over time giving you capital gains when you sell as well as the income earned along the way.
Shares and property are known as Growth Assets.
Quality Growth assets will provide superior long-term returns compared to Defensive Assets, however, will also experience greater volatility than Defensive Assets.
In effect, long term Growth Asset investors are rewarded for accepting that greater volatility.
The message then is, the longer the time between today and the time you will need to spend the money, the more exposure you can afford to have to Growth assets because you will have the time to ride out the inherent ups and downs in markets and achieve a better long term return.
The opposite applies; the shorter your time frame, the less you can afford to have exposed to the volatility of Growth Assets.
In the short term, Cash is King. Investing in Shares and Property for short time frames is speculating, not investing.
If you have a long-term time frame, consider buying quality income producing Growth Assets.
To achieve financial independence, the ultimate idea is to replace the income that you generate with your time, blood sweat and tears, with passive income from your investment portfolio that earns you money while you sleep.