Eggs & Diversification

As Love Islanders love to say: “I don’t want to have all my eggs in one basket”

I never thought I would agree with such a statement but when it comes to investing – diversification is key.

In my previous blog posts I have touched upon a couple of asset classes that one can invest in – bonds, stocks and property – but I will expand upon these today.

First of all, I want to reiterate the point about the importance of distributing your money into different places.

Last week when I talked about market “bubbles” in a ‘simple marketing strategy‘, I stated that as one asset class turns ‘bearish’ (it goes down) then another asset class goes up and becomes ‘bullish’.

This is because the money has to flow to somewhere.

Usually when there is a market correction, high risk assets fall the most and safe-haven assets then increase in value.

The opposite happens (majority of the time) when you have a booming economy, people feel wealthy and unemployment levels are low.

Today’s picture is very different to past times and a topic for another day, however, I hope to elaborate on same of the most well known asset classes retail investors (i.e. people like you & I) can invest in nowadays.

This blog post (part 1) will focus on property, bonds and stocks and then next week I shall cover some others (part 2).

PROPERTY

Probably the most well-known and most popular asset class because it is a “hard” asset, i.e. it exists in physical form and you can touch the bricks and mortar.

People can relate to property because we all have to live somewhere so it is a good starting point, however, can be very expensive.

If you want to get into property investing then a phenomenal podcast I found on Spotify is….you guessed it: “The Property Podcast” – by Rob Dix & Rob Bence.

Check it out!

There are so many ways you can invest in property and a plethora of strategies to adopt so this is worth exploring in your own time.

The reason why property is also popular is because house prices over time have a good track of going up.

This is down to supply & demand.

There are not enough houses being built each year and with an increasing population globally, there are more people than there are houses.

Consequently, with limited supply and high demand: prices increase.

Yes the market fluctuates and dips occasionally (just look at what happened in the global financial crisis in 2008) but if you hold on to the property long enough the price does go higher eventually.

STOCKS

A stock – also known as an equity – is a fraction of ownership of a company.

When a company goes public and is put on to the stock market, anyone can buy a share in that corporation to become a shareholder.

If a company does well and is making lots of profits, then a shareholder can benefit from dividend payouts, voting rights (if you are a common stockholder; not a preferred stockholder) and increased share price.

If a company goes into liquidation and files for bankruptcy then there is a risk you lose your money.

In my blog post on ‘trading vs investing‘, I discussed the 2 different types of people that play in the market sandpit.

Some people buy and sell stocks like they’re going out of fashion and do this for a living, making great gains/losses at times.

While others are investors and hold their chosen stocks for a long period of time and sell when their goal has been met.

You can individually select stocks, if you know how to evaluate a company and it’s future prospects, or you can pick an index fund instead.

This effectively is a portfolio – a basket of stocks – that tracks a certain area of the market.

It dilutes the risk because there are a vast quantity of stocks within this fund so if one goes under, you won’t lose that much money because you have all the other stocks still standing.

Equities are seen as being moderately high risk but it is, of course, a spectrum.

In relative terms, compared to bonds – stocks are a riskier asset.

So if your young and have time to weather multiple market storms then you want to be allocating a higher proportion of your money into this asset class.

BONDS

On the other hand, bonds are seen as a safer option but yield a lower annual return.

Generally, investing is a trade off between safety and profit.

If you are happy with taking home less profits but have a higher chance of having most of your money left after a crisis/dip in the market then you settle with lower risk assets: government or corporate debt.

However, NOTHING is ever a guarantee. Remember that.

A bond is where you lend the Government or company money – an IOU – and they will pay interest on it to you, as well as giving you back to total sum after a period of time, which you decide upon.

From safest to riskiest the order usually goes something like:

Government bonds > Corporate bonds > Junk bonds.

Some bonds are inflation-linked, i.e. the interest or yield return you get from owning this bond keeps in line with inflation so you don’t lose money over time; whereas, some other bonds aren’t.

As a general rule of thumb, people who are either older, approaching retirement soon or have a low risk appetite will have a large proportion of their wealth in this asset class.

NEXT TIME

I have only covered a few asset classes here but next time I will cover some of the other assets out there that might pique your interest.

HEALTH FACT

One might think that our nostrils share the workload when it comes to inhaling and exhaling, however, your nose actually does this through one nostril at a time.

Put your finger under your nose and see what happens!