By: Christopher Wilsmore
Taking the time to work out what your financial goals are can help with not only framing where you want to see yourself in future, but also the path to take to make it a reality.
The accumulation of enough wealth to generate income to self-fund your envisioned retirement lifestyle—is a financial goal that many of us share in common. However, how we work towards achieving that goal, can be vastly different.
For example, the structure (eg super and/or non-super), the method (eg direct and/or managed funds), and the assets (eg cash, fixed interest, property and/or shares) chosen can vary from one person to the next.
Still, in all of these various paths that can be chosen, there is a commonality that we share. Asset classes. We all invest in either one or more of the different types of asset classes to help achieve our financial goals.
The different types of asset classes
There are four main types of asset classes that can be invested in cash, fixed interest, property and shares. Each has its unique characteristics, inclusive of the level of risk and return.
Having an appropriate understanding of these different types of asset classes, and what to expect from each of them, can help in making an informed decision as to which to invest in to help achieve your financial goals.
When it comes to the unique characteristics of each asset class, the details are often not standard across the board. This can be due to the unique characteristics of ‘sub-classes’ within each asset class, as well as the chosen underlying individual investment itself.
Below is a general overview of the unique characteristics of each asset class.
Please note: The asset classes have been grouped according to their categorisation, namely, defensive or growth.
Defensive assets Generally, in contrast to growth assets, offer a lower degree of volatility over the short-term, but lower returns over the long-term. | Growth assets Generally, in contrast to defensive assets, offer a higher degree of volatility over the short-term, but potentially higher returns over long-term. | |||
Cash | Fixed interest | Property | Shares | |
Examples | Transaction accounts, savings accounts, cash management trusts | Term deposits, government bonds, corporate bonds, debentures | Residential property, commercial property, industrial property | Australian shares, international shares |
Focus | Income | Income | Income & capital growth | Income & capital growth |
Liquidity | High | Relatively high | Low | Relatively high |
Expected rate of return | Low | Moderate | Moderate to high | High |
Returns | Income (regular interest payment) | Income (interest payments for an agreed period) and potential capital growth (or loss) | Income (rent) and capital growth (or loss) | Income (dividends) and capital growth (or loss) |
Risk level | Very low | Low to moderate | High | Very high |
Time horizon | No recommended minimum | Short to medium-term | Long-term | Long-term |
Moving forward
In broad terms, when it comes to achieving your financial goals:
It’s important to note that while the above is an overview of several of the unique characteristics of each asset class, many other investment-related considerations need to be taken into account prior to deciding to invest.
Next Steps