1. Cash
Cash deposited in banks or building societies earns interest and is the least risky asset type. Its buying power can fall over time due to inflation.
2. Bonds and Gilts
Bonds and Gilts are loans to companies and governments respectively, and are also sometimes known as fixed-interest securities. They pay interest at a fixed rate over a fixed term. The original loan amount is also repaid at the end of the term. They tend to be classed as lower risk than shares but their value can be affected by the financial strength of the company or government that issues them. Interest rates can also affect their value.
3. Property
Investing in property can be direct or indirect. The second of these could be a Unit Trust invested in commercial property, for example. Overall, the risks and potential returns tend to be higher than for bonds or cash. However, property is a limited market and the time needed to buy and sell can mean that property takes longer to cash in.
4. Shares
Owning a share of a company will earn a share of any income or capital paid out. They tend to carry a higher risk than the asset classes listed above. Share value can be affected by changes inside the company and also in the markets they trade in. However, shares also have the potential to deliver greater returns.
5. Commodities
Physical goods such as gold, oil or crops. They often carry a higher risk than shares because their prices can be harder to forecast, as prices rise and fall due to unpredictable events such as natural disasters and political unrest. However, because their prices can move differently to other assets it can make sense to invest in these alongside shares and bonds as they can help to balance your portfolio.
6. Diversification
You may not want to put all your eggs in one basket. Investing in a range of assets in different sectors and markets can help to balance out the ups and downs of the stock market, as any poor performance by some investments may be offset by gains in others, which may reduce the risk of loss.
Investing in managed funds can be an easy way to build a diversified portfolio as they tend to include a variety of asset types.