Spreading your investments around is not a new idea. The advice ‘Don’t put all your eggs in one basket’ is a simple, but powerful, concept that can be traced back thousands of years.
In the Bible King Solomon advised “Put your investments in several places—many places, in fact—because you never know what kind of bad luck you are going to have in this world”. (Ecclesiastes 11:2).
Around the same time the Talmud, a Jewish text, advised “Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve.”
Clearly long ago people far wiser than us knew the benefits of spreading investments.
Today, experts will advise you to structure your investments across a portfolio using terms such as ‘asset allocation’ and ‘diversification’. Don’t let the jargon distract you, this is a powerful strategy which can benefit you.
What are the asset classes?
The main types of investments (or ‘asset classes’) are cash, fixed income, property and shares.
Cash and fixed income are defensive assets that provide income and help protect your capital. They are low risk but offer relatively low return.
Property and shares are growth assets that provide income but they can also offer higher potential capital growth (or capital losses).
How can you invest in asset classes?
Cash is held in bank accounts and high interest online accounts. These fund your living expenses and help meet short term emergencies.
Fixed income investments include term deposits and bonds (via managed funds and exchange traded funds). They are relatively safe but offer returns only slightly higher than cash.
A bricks and mortar property can provide rental income, potential capital gains (or losses) and tax benefits. You can also gain property exposure via Real Estate Investment Trusts on the ASX (‘REITs’ such as Westfield), managed property funds or exchange traded property funds.
A low cost, online broker can be an easy way to buy shares. Most investors prefer blue chip investments (eg the largest 20 stocks on the ASX such as BHP, ANZ, NAB, etc). Shares provide dividend income, franking credits and potential for capital growth (or losses).
It’s all in the balance
Here are some useful rules of rules of thumb. For a balanced portfolio hold 50% in defensive assets and 50% in growth assets. For a conservative portfolio you could hold 70% in defensive assets and 30% in growth. For a growth portfolio you could hold 30% in defensive assets and 70% in growth assets.
Spreading your investments across the asset classes is a modern interpretation of King Solomon’s advice. How much you allocate to each asset class depends on your approach to risk and return, and your goals. Keep this in mind when making your investing decisions and, if you are unsure, seek professional advice.
Remember that the notion of spreading your investments around is as old as Solomon was wise.