Last update: 26.01.2018 04:07
People who want to invest their money today are often overwhelmed by the multitude of options.
Funds here, structured products there.
Yet only a few asset classes form the basis for all possible combinations.
Knowing their characteristics and properties is essential when making investment decisions.
The classic asset classes (in bankers’ jargon: asset classes) include Cash, shares, bonds and real estate. An asset class combines investments with similar characteristics.
Cash or money that you have available in your bank account is primarily just that: available.
It earns you little to no interest and loses value due to inflation.
Shares are shares in companies – you own a fraction of them.
If your company makes a profit, you also make a profit as the owner.
Bonds are fixed-interest securities, i.e. you lend your money to a debtor, which can be a government or a company, for example, and you get it back with interest if your debtor does not become insolvent.
Real estate is property rights to real estate.
You can hold these directly (your house, apartment9 or indirectly via a real estate fund.
An example
Lukas receives CHF 5 in pocket money, which he diligently puts into his piggy bank.
Lukas knows that he always has money available to buy chocolate if he wants to.
But he is actually saving up for a kite, which costs CHF 40. In the cash scenario, this means receiving 8 times pocket money and a certain date when he will receive his kite – unless kite prices rise in the meantime.
Moritz now makes Lukas an offer that is the equivalent of a share investment.
Lukas should give him his pocket money, which he uses to buy lemons and make lemonade for his lemonade stand.
Moritz would easily make CHF 8 from the sale of lemonade out of CHF 5 for the purchase of lemons.
That sounds tempting for Lukas, because he could buy his kite with the fifth pocket money he invests.
On the other hand, what if Moritz is stuck with the lemonade and sells nothing? In the share scenario, Lukas therefore has the opportunity to make a profit but also a loss.
Moritz is so sure of himself that he offers Lukas a loan to bear the risk of loss himself.
He wants to borrow Moritz’s pocket money, make his lemonade business with it and then pay him back the pocket money with interest: For CHF 5 lent, Lukas gets CHF 6 back.
It doesn’t matter to Lukas whether Moritz is successful, because Moritz has to repay his debt with interest to Lukas either way.
The default of his debtor Moritz is quite unlikely for Lukas: at the age of 7, he will neither go into hiding nor leave the country. In the bond scenario, Luke has to wait until the 7th pocket money for his kite, but then he is almost certain to get it.
Instead of saving up for a kite or giving his money to Moritz’s lemonade business, Lukas could also buy his own lemonade stand (a property).
He could use it himself or rent it out.
The stand would soon be worth much more than a kite, because thanks to global warming, people would certainly be thirstier.
On the other hand, a tropical storm could also sweep the stand away, which again speaks in favor of buying a sturdy kite. In the real estate scenario, Lukas can therefore buy a supposedly safe investment.
In this simple example, Lukas has to weigh up the prospect of profit against the risk of loss.
Now, the world is not quite as simple as a lemonade stand and there are many variants based on these basic asset classes. However, every investment can be assessed according to the three criteria of security, liquidity and return.
The criteria
For security is about preserving the invested assets.
The security of a capital investment depends on the risks to which it is exposed, e.g. the creditworthiness of the debtor, the price risk or the currency risk.
With liquidity is about the availability of the invested assets: how quickly can your investment be converted back into bank deposits or cash?
Securities traded on the stock exchange are generally well suited to this, while your condominium or investments in closed (i.e. not publicly tradable) companies are not liquid.
Under yield The return on an investment is the ratio of the return on a capital investment to the capital invested.
Returns include interest payments and distributions or increases and decreases in value.
Depending on the type of investment, income can accrue to you regularly or not be distributed and instead be accumulated.
Income can remain the same or fluctuate over time.
The three criteria of security, liquidity and return are in tension with each other. In order to achieve the highest possible level of security and liquidity, you have to accept a lower return – as is the case with cash, for example.
And high returns and high security can lead to restrictions in liquidity – as is the case with real estate.
And for high returns with high liquidity, you have to make sacrifices in terms of security and bear a higher risk – as with shares.
This means that you need to think about your preferences in the dimensions of security, liquidity and profitability and align your investment decisions accordingly when you think about investing.
Here you can find out everything about the individual asset classes in detail or about ETFs (Exchange Traded Funds) in particular.
These instructions show you how to invest and profit in the financial market
This is how it works: Open a custody account
Here’s how it works: Invest in ETFs
How it works: Invest in shares with a few ETFs
