A quick guide to investment asset classes

What do you see when you think of an ‘investor’? It’s easy to visualise a well-heeled person in a sharp suit clutching a financial newspaper, but the truth is very different.

Many of us are investors either through our pension or something like a stocks and shares ISA. So, it can be a good idea to understand where your money is being invested and the terms you may come across. 

If you invest using investment funds, it will put your money into different asset classes for you, depending on the type of fund or pension plan you've chosen. 

We'll look at the main asset classes you could be invested in here. 

No one asset class is necessarily better than another. Each one is tailored to different investment goals and risks. It can be a good idea to balance your overall investment by using a mix of different asset classes. As each asset class reacts differently to market conditions, it could help to reduce losses if one asset class performs badly.

There are four main investment categories into which most of our money is invested. These are referred to as ‘asset classes’. They are:

1. Cash/Money market investments
2. Fixed interest
3. Equities – UK and International (Shares)
4. Property

Let’s start with the one that many people understand best: cash.

Money market investments are also known as cash investments. They are short-term deposits of cash amounts, usually held with a financial company for less than 12 months. Please note they are not deposit accounts with banks or building societies.

Although these investments are less risky than other asset classes, they can sometimes fall in value, for example if an organisation is unable to pay back money it has borrowed. Their value can also be gradually affected over time by inflation and the effect of charges.

Government bonds (defensive bonds) and corporate bonds (growth bonds) are examples of fixed interest assets. In the UK, government bonds are also called gilts.

Government bonds are loans issued by governments to pay for things such as public services. They’re a way for them to borrow money, usually for a fixed term. Governments then pay interest on the loans.

International and UK Corporate bonds are loans issued by companies to pay for their operations or to grow the business among other things.

UK gilts issued by the UK Government are generally seen as lower risk investments than bonds issued by companies (corporate bonds).

Bonds pay the holder of the bond a regular income, and then the full value of the bond is paid when the bond comes to the end of its lifetime. Bonds carry interest rate risk - changes in interest rates or inflation can contribute to the value of the bond going up or down. For example, if interest rates rise, the bond’s value is likely to fall. There’s also the risk of the bond issuer becoming unable to pay back the money it has borrowed.

Equities are company shares. They represent part-ownership in a company. Companies issue shares on stock exchanges such as the London Stock Exchange, and the shares are then bought and sold on stock markets. Their value can go up or down.

While there is more potential for gains with shares than some types of investment, there is also greater risk that they will fall in value.

This usually refers to commercial property. Shops, offices and warehouses are examples of commercial property. There are two components to an investment in commercial property – the value of the property itself and the rental income received from the tenants of the property.

Commercial property can be subject to heavy falls and sharp increases in value. Property isn’t always easy to sell because it can take time for the purchase or the sale to be completed, and as a result, to access the money from the property. Property funds may also invest in indirect property investments, including quoted property trusts and unregulated collective investment schemes.

At times of uncertainty, it’s understandable to have a sense of worry. But when it comes to investing, it’s helpful to not let worry become panic. Investment decisions made under stress are rarely good ones.

It’s also helpful to remember the long-term nature of many investments, especially those in ISA or pensions. It’s wise to not let short term volatility dictate long-term investment decisions.

And finally, it’s often sensible to seek help. Unless you’re an experienced investor, you may choose to leave investment decisions to someone else. If you have a financial adviser, they will help you select funds that meet your financial objectives within your personal tolerance for risk. Pension providers also offer ready-made investment portfolios for do-it-yourself investors to choose from.