You Need Class Consciousness
Financial and pensions advisers – like any other professionals – can be guilty of using too much jargon.
At best, this irritates the uninitiated and, at worst, mystifies them, obscuring what should often be straightforward.
One of the most basic things that often isn’t adequately explained, but is fundamental to a proper understanding of investments, are the various asset classes and their characteristics.
Put simply, an asset class is a type of investment. There are benefits in holding different asset classes and investing in them is appropriate in different sets of circumstances. Too many investors don’t appreciate the importance of adjusting their investments between classes as conditions change.
Let’s run through some of the main asset classes.
This is the one that everybody understands. It can have an important role in a portfolio, being the main asset class for managing risk. During times of market uncertainty, cash can reduce the volatility of the overall portfolio. While the price of other assets may be falling, cash will hold its value better. Not only that, at Reeves, we take the view that in these volatile times, holding cash allows us to react swiftly to any buying opportunities, without having to take the time to sell other assets first. We advise and agree with our clients any action that needs to be taken.
The disadvantages of holding cash is that, when markets are rising you are missing out on the potential growth and, at the same time, as current interest rates are not keeping up with the current rate of inflation, the real value of your cash is being slowly eroded.
This is an important element in the diversity of a portfolio. It provides a steady income over the long term from rental yields and historically it has been a good hedge against inflation. Property is also resilient in different market conditions.
The downsides are that in strong markets it will underperform equities. As property is a physical asset and it takes time to sell, it can also create liquidity problems, as happened in 2016 after the Brexit referendum, when many investors took fright and tried to withdraw money from their property funds, which caused many to suspend trading so people couldn’t get their money out. Property funds run by Standard Life, Columbia Threadneedle, Janus Henderson, M&G, Aviva and others suspended withdrawals.
Equities is another name for shares. You can invest globally with equities, which increases the diversification of the portfolio and your exposure to different opportunities, such as expanding markets in the Far East. When markets are buoyant, equities are what really drive accelerated growth in a portfolio, providing both regular dividend payments and capital growth as share prices rise.
However, there are times when putting your foot on the accelerator can be dangerous. Equities are volatile and they react differently in different market conditions. If markets fall, equities will be the most affected part of the portfolio and the investor can sustain big losses.
These are goods that can be traded, such as oil or precious metals. They can bring exposure to different growth opportunities and, again, increase the diversification in the portfolio. Historically, in uncertain times, investors tend to flock towards assets such as gold. The disadvantages are that they are volatile and they don’t pay any income.
It’s important to diversify across all the asset classes and geographical locations, as this controls the risk and reward of the portfolio. It's also important to constantly review your mix of assets and receive good independent financial advice on how market, economic and political conditions may affect your portfolio and amend accordingly. Investing is class act.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover.