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Asset allocation refers to how an investor distributes his or her investments among various investment asset classes. Asset classes are types of investments, the main being cash, fixed interest, property and shares. There are typically differing levels of risk and return associated with the asset classes, and different minimum suggested investment timeframes. As such, some asset classes may be more suitable to investors, depending on objectives and aversion to risk. Differing risks mean also that certain types of risk can be reduced by diversifying an investment portfolio across different asset classes.
The following are the main asset classes:
Asset: Cash
Cash generally refers to money that is invested in bank bills and similar securities with a short-term investment timeframe. The return on cash is interest, and investors can access cash through a bank account or through managed funds that invest in cash. Cash is generally considered relatively safe compared to other asset classes, with cash investments generally providing a stable return with low potential for capital loss.
* Minimum suggested timeframe: No minimum
Asset: Fixed Interest
Investing in fixed interest securities, such as bonds, generally operates in the same way as loans. A fixed interest security is purchased using cash, and in return the investor receives a regular interest payment from the security issuer, normally a government or company. The value of the bond can fluctuate based on interest rate movements, and when the bond matures the loan is repaid in cash. Historically, bonds have provided a more consistent but lower return than shares.
* Minimum suggested timeframe: 1-3 years
Asset: Property
Investing in property generally involves buying a property directly, or investing in property securities or units in a property fund or trust. Listed and unlisted property trusts and funds hold real property investments in sectors such as office, industrial, retail and residential. Listed property trusts are listed on the stock exchange and are traded much like shares, whereas unlisted property trusts are not and as such tend to be less liquid. Historically, property investments have tended to be less volatile than shares.
* Minimum suggested timeframe: 3-5 years
Asset: Shares
Shares represent part ownership of a company and can generally be traded on the stock exchange. Shares are considered growth assets, meaning that they offer the potential for higher returns. It should be noted though that shares also typically involve higher risk than is associated with other asset classes, with greater short-term volatility. Historically, over the longer term they have tended to outperform other asset classes. Australian shares and international shares are often regarded as different asset classes due to the differing risks associated with each.
* Minimum suggested timeframe: 5-7 years
Investors should note that past performance is no indication of future performance. |
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