So Equities (buying shares in listed companies) is the top-earner among the asset classes? Does that mean you should plonk all your funds into equities?
No. Not at all.
“Don’t put all your eggs in one basket,” as the saying goes. Each asset class carries some risk and some benefit.
The ideal investment portfolio is diverse; some funds will be allocated to each asset class.
Different asset classes perform poorly or well as they respond to market conditions, for example:
- Stocks generally take a dip early on in a recession; at that time, it might be a good idea to be holding more cash assets (and then as equities turn up, you have liquid assets with which to buy stocks)
- Cash assets do well when inflation and interest rates are high
- Bonds do badly when high inflation is expected
- The property market often takes a dip at the beginning of a downturn, but does well when interest rates drop.
Decisions about how to diversify should be tailor-made to the individual. Some questions you might want to ask:
1. What’s my time-horizon?
This is the number of months, years or even decades you have to achieve your goals. The more time you have, the more you can take risks and trust in time to smooth out the bumps in the road. Stashing a larger proportion of your funds in the stock market, in carefully chosen stocks, can yield very well, as can the property market, but as we’ve seen, there can be tremendous fluctuations.
2. How risk-averse am I?
Your time-horizon will help you decide on this, too – if you are a few years away from retirement, for example, you’ll be more risk-averse, perhaps more inclined to steer clear of heavy investment in equities and weight your portfolio more to bonds, as you won’t want to risk taking a bath on stocks that suddenly turn down.
But even younger people might want to ask themselves how comfortable they are with risk-taking: no matter how good the returns, if the stock market is going to give you nightmares, you might be better off keeping your equities slice thinner.
The aggressive risk-taker is happy to risk losing something to make big gains, while the conservative, risk-averse person would rather earn less and be assured of hanging on to their capital.
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