How_Money_Works_-_The_Facts_Visually_Explained

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PERSONAL FINANCE

Managing investments

How it works

Asset classes are different categories of investment.

Investors diversify by investing in different asset

classes, or investing in different companies, industries,

markets, regions, or countries, within an asset class.

Another strategy, known as asset allocation, attempts

to balance risk versus reward by setting the

percentage of each asset class in an investment

portfolio—stocks, bonds, property, cash, and

alternative assets—according to the investor’s risk

tolerance, goals, and investment time frame. The

percentage of a particular holding in a portfolio is

known as the “portfolio weighting.” Diversification

helps reduce the risk of each asset class in the portfolio.

CASH CASH CASH CASH

PROPERTY

PROPERTY

PROPERTY

PROPERTY

PROPERTY

PROPERTY

$$$ $$$

BONDS
40%

CASH

20%

PROPERTY 20%

Defensive investment

In this illustration, the investor

has chosen to invest 40

percent of capital in bonds,

and 20 percent each in stocks,

property, and cash.

ASSET ALLOCATION

MODELS

❯❯Defensive A small proportion of

equities (stocks and shares) with

the bulk of the capital invested in

less volatile asset classes such as

bonds and cash.

❯❯Income Most of the investment

is in bonds and alternative assets.

This model is designed for income-

seeking investors willing to take

on a reasonable degree of risk

❯❯Income and growth Around half

of the fund is in equities, with the

remainder in bonds and

alternative assets. This model

focuses on a return composed of

both capital growth and income.

❯❯Growth Most of the investment is

in equities, but some in bonds and

alternative assets. This model aims

for longer-term capital growth.

Liquidity

This term describes the degree to which an asset

or security can be bought or sold in the market

without affecting the asset’s price.

$$$

INVESTMENT

RETURNS

Expected returns

of asset classes

Stocks 10%

Property 8%

Bonds 5%

Cash 3%

Average 6.5%

Investor’s

expected returns

20% of 10% 2%

20% of 8% 1.6%

40% of 5% 2%

20% of 3% 0.6%

Tot al 6.2%

“Have a strategic

asset allocation

mix that

assumes you

don’t know what

the future holds.”

Ray Dalio

US_188-189_Asset_allocation_diversification.indd 189 14/10/2016 14:52