Understand asset classes if you want to do better with your investment than most people. You’ll need to behave yourself too but understanding asset classes is a necessary step on the journey.
An investment is something that has an in built mechanism for increasing capital values AND paying a regular income. If it doesn’t in is not an investment. It’s a speculation an it’s value is determined by the laws of supply and demand.
Gold is NOT and investment. Crypto is NOT an investment. FX trading is not investing. That’s a speculating and it’s the modern equivalent of panning for gold (kind of).
Cash is an odd one. It’s not an investment. Its capital value doesn’t increase. A £100 deposit in the bank will only ever be £100 (ignoring interest) but most bank accounts do pay some level of interest (regular income). So we’ll allow cash in as an asset class but remember it is not a good store of wealth (because it’s value is eroded by inflation). Put another way don’t hold on to cash for the l;ing term unless it’s your emergency fund.
Investments (as defined above) can be divided into 4 broad asset classes
- Cash
- Property (rentals)
- Fixed income (bonds and gilts)
- Equities (shares)
So we’ve already outlined cash and its limitations
Property is a bit more obvious. It’s buildings. Owned in a fund that might invest directly in several properties (known as a bricks and mortar fund). The property fund is the landlord (usually of commercial premises rented to businesses) and rental income is paid to the fund. The fund will declare investment returns each year and distribute to investors.
Some property funds are real estate investment trusts (known as REITs). These funds invest in the shares of other property companies. The REIT receives the dividends from the property companies which can be paid as investment returns.
Property can also be owned directly and rent it out to a tenant (individual or business). They pay you a rent (income) in return for using the property. The capital value may increase over time.
The downside with property is that it is not diversified (it’s a building on a street in a town/village). Property prices are determined by the laws of supply and demand. Flats with flammable cladding on them are much less valuable that they were a few years ago.
There’s also the problem of releasing capital from a property. It isn’t possible to