We’ve just hit the middle rounds. It’s where we separate the weak from the strong. Keep punching on. You can do it.
Recap from last week
Last round it was all about the Defensive Asset classes, Cash and Fixed Income. Like we said, these are the kind of investments which tend to do less badly when the economy is doing badly. If you think about it, it kind of makes sense. Cash is, well cash. It is savings which you have lent to a bank for a very short period of time. In return for you lending them this very short term money, they pay you a very low rate of return. You don’t really mind though as you’re taking very minimal risk on your investment. In fact, the only way you can lose money on it is if the bank you’ve put your savings with goes bankrupt. It’s never happened in Australia, but it can.
Fixed Income is just like cash except you’re lending your money for longer. Whereas you may put your savings in a bank account for a couple of months, with fixed income (or bonds) this could be for many, many years. The longer you’re lending it for, the greater your risk of course, but similar to cash, the only way you really lose money with this kind of investment is if the company you’ve lent money to goes bankrupt.
Anyway, those are the defensive asset classes. Investments which are supposed to protect your money when times are bad. But what about when times are good?
Well, please allow me to introduce you to the Growth Assets.
Growth Asset Class
These are the kind of investments that tend to do well if the economy is doing well. The best way to think about these is that they are investments where you as the investor get to share in some of the upside of the company because with these types of investments you actually own a portion of the company. And you because you do, you are therefore entitled to some of their profits. That’s why when times are good these types of investments tend to do better. Because when times are good, companies tend to make bigger profits and when they make bigger profits their value goes up.
There are three main types of investments within the Growth Asset class. Public Equity(think shares on the stock market), Private Equity (think shares in companies which are not listed on the stock market – ie Uber, Spotify and AirBnB) and Real Assets (think physical buildings, toll roads and airports).
I’ll cover each of these in detail….. next week.
For now, that’s 5 minutes. Hope it helped.