Investing 101: What are asset classes? [Singaporean Guide]

What are Asset Classes?

The term “asset class” refers to a group of investments with similar characteristics and risks profile. Each asset class has its own set of characteristics that can affect a portfolio’s risk and return potential. Understanding how each asset class works is essential in constructing a diversified portfolio that meets your financial goals.

Today, we will discuss the 8 major asset classes out there today!

The 6 types of asset classes

Historically, there are 3 main asset classes: Equities (Stocks), Fixed Income (bonds), and cash equivalent / money market instruments.

Today, these have expanded to include Real Estate, Commodities, Crypto Currency, Derivatives and Alternative Investments.

Understanding the risk and returns of the different asset classes would help you construct an investment portfolio to help you attain your goal.

Asset Class and Investing Strategy

Equities (Stocks):

Equities or Stocks are one of the most popular asset classes for investors because they offer the potential for growth over time as well as dividend income. Stocks are commonly issued by companies and are easy to purchase. Examples of stocks include APPLE, GOOGLE, SINGAPORE AIRLINES etc…

Typically, Investing in stocks requires researching individual companies to determine which ones may be a good fit for your portfolio. You also need to consider risk factors such as volatility and liquidity before making an investment decision.

However, recently, there have been an increasing trend to purchase Managed funds and Exchange Traded Funds (ETF). These funds are a chosen basket of stocks, that is easy for investors to purchase. These funds typically invest in a specific sector or could be broad based, making it easier for investors to invest.

Find out more about the various Equities Strategy such as dollar cost averaging, thematic investing and core-satellite portfolio creation here!

Bonds:

Bonds are debt instruments issued by governments or corporations that pay interest regularly until the bond matures. They offer a steady income stream but tend to have lower returns than stocks due to their fixed nature. Investing in bonds is often used as part of a diversification strategy since they tend to perform differently than stocks during market turbulence or economic downturns.

Typically, bonds are issued in denominations of 10-year, 15-year, 25-year etc. During this 10-year period, an investor would receive a fixed coupon (or interest payment), either monthly or yearly. The coupon payment rate typically ranges from 2-4% during normal economic conditions.

Bonds are generally good if individuals want an income generating stream without taking too much risk.

Cash Equivalents:

Cash equivalents are low-risk investments that provide liquidity and stability within a portfolio. Examples include money market funds, certificates of deposit (CDs), Treasury bills (T-bills) and short-term government securities like Singapore Savings Bonds or notes from other countries’ central banks. They also include fixed-deposits from the bank.

Cash equivalents can provide some protection against inflation while still offering modest returns compared to other types of investments such as stocks or real estate .

You can learn more about the Singapore Savings Bond and fixed-deposit here!

Real Estate:

Real estate is another popular asset class among investors due to its potential for capital appreciation over time and its ability to generate rental income through leasing out properties. The type of property chosen depends on the investor’s goals – residential homes, commercial buildings, land development projects, etc – each requiring different strategies when it comes to buying and selling properties.

Traditionally, property investment would involve an individual to purchase a property before renting it out to collect a rental fee. Property investors might also “flip” the property by purchasing at alow price, and selling it higher once a location develops.

However, with cooling measures and government restrictions, it may be wiser to invest in Real Estate Investment Trusts (REITs) instead. REITs are similar to properties, however instead of owning properties, you invest in companies that build properties such as Capitalland, Mapletree etc.

Commodities:

Commodities refer to goods bought or sold on global markets, including agricultural products, energy sources like oil & gas, metals like gold & silver, etc. Investing in commodities involves taking advantage of price fluctuations based on supply/demand dynamics which means it carries higher risks than other types of assets but also offers greater rewards if done correctly.

Strictly speaking, Commodities are traded on futures or forward basis on the mercentile exchange. However, in online brokers, Commodities are traded as Contract for Difference (CFD) such that it is traded like a normal stock.

Crypto Currencies: 

Cryptocurrency is an asset class that is becoming increasingly popular, thanks to the rise of digital currencies such as Bitcoin, Ethereum and Litecoin. These digital currencies are decentralized, meaning they are not controlled by any single entity or government.

Instead, they use a distributed ledger technology called blockchain which records and verifies transactions in a secure way. Cryptocurrencies can be used to purchase goods and services, but they also provide investors with an opportunity to gain exposure to an asset class that can potentially offer high returns over the long term.

While cryptocurrencies are strictly “decentralised”, they can be traded over centralised exchanges such as Binance, Bybit, KuCoin, OKX and more.

Cryptocurrency is a high-risk (volatile) asset and we suggest you exercise caution when investing in cryptocurrency. Learn more about Cryptocurrency from our Ex-Bybit Blogger.

Alternative Investments:

Alternative investments are non-traditional options such as private equity, venture capital, hedge funds, options and derivatives. These assets tend to be more complex with higher fees attached, so they should only be considered by experienced investors who understand how these markets work.

Diversification within asset classes

Diversification within asset classes is a common strategy used by investors to manage risk and maximize their returns. Diversifying means investing in a variety of assets, such as stocks, bonds, mutual funds, and other securities. By diversifying, an investor spreads their risk across different asset classes like equity or fixed-income investments. This approach helps an investor reduce the overall risk of their portfolio by ensuring that not all of their eggs are in one basket. Diversification also provides the opportunity to invest in different types of markets, which can help create more sustainable returns over time. Ultimately, diversifying within asset classes is one of the best ways for investors to manage risk and maximize their investments.

Invest Smarter with SG Insurance Hack

The SG Insurance Hack’s approach to investing prioritizes buying and holding quality funds for long periods of time. We focus the most on megatrends and the industry we invest in, rather than on their stocks’ short-term price changes.

When we recommend a fund to any user financial consultancy service, we are recommending that you utilise the dollar cost average strategy to buy and hold for at least 10 years. We want you to invest only money that you won’t need in the next ten years.

For all the funds offered by us, we’re also investing our own money for the long term.

Let’s talk about the stock market. It fluctuates. It may fluctuate 8% up this month, 20% down the next and up and down up and down. The stock market actually loses value in one out of every three years.

However, over a 10-year period, historically, the stock market’s value rises and makes money for investors. Why? Because over long periods of time, price fluctuation does not matter. A stock’s long-term performance reflects the efforts, financial discipline, and creative innovation of companies, entrepreneurs, and people like you.

We can help you to build your wealth. Structuring your portfolio in a way that enables you to endure market downturns is your first step. You don’t have to invest all of your long-term savings at once, either. Let’s build wealth, together, for the rest of your life.

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