Market and asset classes
Markets and asset classes
One of the best ways to get a good balance between risk and reward is to build a diversified portfolio covering a mix of asset classes, geographies, industries and types of companies – and all of these can be accesses via tracker, or exchange-traded, funds.
What this service covers
We aim to help you build a portfolio that is properly balanced between risk and return. You can choose one of our ready-made portfolios or build your own portfolio using funds from our top tracker list to suit your personal needs when it comes to your overall goals, target returns, time horizon and risk appetite.
In all cases, the investments should be held on a medium-to-long term basis, by which we mean three to seven years.
There are three major asset classes covered in our free investment guidance service and they all have their own characteristics. An explanation of each asset class is given below, but it is important you appreciate by investing in a tracker fund, you are buying a fund that tracks a market with the underlying investments as described below.
Shares, also known as equities
Shares – also known as equities or stocks – can be more risky but have the potential to provide higher long-term returns, either in the form of income or capital gains, or a mixture of both. They can however be volatile and prone to losing as well as long winning streaks, even if over time history suggests they provide returns which help protect money from the effects of inflation.
Larger companies’ shares are typically less risky than those of smaller companies.
Developed stock markets - those in the West or Japan – tend to be better regulated, more transparent and less risky than emerging markets, the up-and-coming economies of Asia, Latin America, the Middle East or Africa, where there can also be greater geopolitical risk.
As you will expect, typically those investment markets and asset classes with the bigger risk come with a greater potential for larger gains and losses.
Bonds, or fixed-income
Bonds – also known as fixed-income investments– are less risky, focus on income and provide lower but steadier returns than equities. Individual bonds provide pre-determined interest payments, or coupons, and should also see the return of the initial investment when the bond matures. The big danger is inflation rises, as this would force bond issuers to offer higher coupons on new bonds and tempt owners to sell their existing holdings to get access to the improved coupons. By investing in a fund that tracks a bond market, you are investing into a basket of bonds with varying terms, coupons and counter parties.