Asset classes – or investment vehicles, if you like – are generally placed under three or four classes:
Cash (aka money market)
These are short-term investments – with some, you can get access to your money almost immediately, as they only require one day’s notice to withdraw.
Notice periods vary, and of course, the longer the notice period, the higher the interest rate. But even the longer-term cash or money market products don’t offer much in the way of interest.
Examples are: on-call deposits in banks, bank certificates of deposit, bankers' acceptances.
Pros: Generally the safest asset class and easily accessible.
Cons: Low interest rates, not a good protection against inflation.
Bonds
When they need to raise funds, government, state entities, parastatals and corporates issue debt instruments called bonds to investors. The deal is, let us use your money for a while, and we’ll pay you interest.
This is usually paid over as a fixed amount at a fixed time annually, and the interest rate is also fixed at the time of purchase. Bonds mature over a longer period, usually several years.
Pros: Low to medium risk; certainty about rate and annual payment
Cons: If rates or inflation go up, your yield doesn’t go up with them; not the best protection against inflation
Property
Everything in the real estate arena, from buying a second house to let for rental income (‘buy-to-let’) to purchasing an office block or investing in listed property companies, falls under the property asset class.
Pros: Decent returns and a steady flow of income; a good hedge against inflation.
Cons: Illiquid asset – it’s not easy to lay your hands on your cash if you are suddenly faced with a crisis
Equities
Buy a piece (a ‘share’) of a company listed on the Stock Exchange, and you can participate directly in its fortunes, whether good or bad. A portion of the company’s profits are paid out to the shareholders as dividends. In 2012, for example, companies listed on the Johannesburg Stock Exchange paid R305bn in dividends to their shareholders, 2.3% up on 2011.
Companies are not obliged to pay dividends: a start-up, for instance, may retain any profits for a year or so, in order to plough them back into the business.
Pros: This is the asset class which gives the highest return, and it’s in a relatively accessible form (shares can usually be readily traded).
Cons: It is the highest risk asset class – you are subject to the risks that affect the economy itself.
- Fin24
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