What assets can I invest in?

Capital at risk. The value of your investments can go up and down, and you may get back less than you invest.

Diversification is one of those investing buzzwords you can’t get away from, and for good reason. Holding a squad of uncorrelated assets that can take the lead when a teammate is struggling can help reduce the size of the swings in your overall portfolio. But what actually are these ‘assets’?

Here’s a rundown of some of the most common asset types investors hold in their portfolios.

Shares, equities, stocks - whatever you want to call them, they represent real companies listed on stock exchanges around the world. Companies typically opt to sell their shares to raise money for their own growth plans.

When you buy a share, you become a part owner in a business and your invested money is exposed to how that company’s performance translates into the value of its stock.

A lot of investors get overly obsessed with share prices hopping around their screens. However, it’s important to remember there are actual companies underneath them all, whose operations ultimately inform the value of their shares in the long run.

Stocks tend to sit at the higher end of the risk spectrum as companies can fail and there is the possibility the value of a company’s shares could drop to zero. That might come across quite scary but the reality is it’s not a coin toss for every listed firm. For example, in the early days of the burgeoning technology sector, there would have been a lot of risk in putting money into companies not long out of bedrooms and garages. Had you done so, the reward would have been pretty incredible. And therein lies the relationship between risk and reward that is so important in investing.

Instead, you could choose to buy shares in a mammoth industrial company, which is unlikely to experience earth-shattering growth but whose fairly regular profits let it eke out some growth and pay its investors a dividend income. Not the same level of risk as in our first example, but arguably nowhere near the potential reward.

If shares are tickets giving you part ownership in a company, bonds are ‘I owe you’ post-it notes.

Governments and companies offer them to investors so they can raise money for their own spending plans. However, with a bond comes a promise to pay the investor interest payments for the life of the loan, after which they get the money returned to them.

These tend to carry less risk than equities but, again, that’s a sweeping statement. When you buy a bond the interest rate payment (commonly called the yield) on offer has to reflect how creditworthy the issuer is. Put simply, if the government or company looks iffy, they’re going to have to entice you with a higher yield than a more stable outfit. A country with a low credit rating can only raise money for public services etc. if you weigh up their ability to pay you back with the yield on offer, and go for it.

It’s the same thing with companies who would rather borrow money from the market than issue more shares and give away their ownership.

In both instances, the yield on offer is unlikely to match the growth potential of the stock market but the risk can be significantly lower, especially as bond investors usually get paid back first if a company goes bust and has to try to get cash back to investors.

Commodities are raw and basic materials we use to produce goods and services. Wheat, oil, gold, coffee beans and copper fall into this bucket and, while you could choose to hold the physical asset in the hope its price will rise, it’s common to hold a fund (explained further down) which tracks the price of the asset instead.

That’s possible because the likes of sugar and lithium are standardised, meaning no matter where they’re produced, they have the same price. Supply and demand drive price changes in commodities, which are themselves affected by weather, seasonality and geopolitical influences like the outbreak of war.

It’s because of these factors, which can be sudden, highly influential and unforeseen, that commodities tend to carry a higher risk profile than equities and bonds.

Brits are obsessed with owning property. That mainly revolves around renting out flats, houses and general residential properties though. When we’re talking about holding real estate in our investment portfolios, alongside other asset types, we’re normally talking about commercial and industrial properties, large housing developments or blocks of student flats.

These projects are pretty huge and out of reach for most individual investors, so owning a piece of them that you can buy and sell through other investors is a common way to access the real estate asset class. You can do this through large pooled investment funds listed on a stock exchange, which hold the real estate and issue shares to anyone who wants to own a piece of it all. Fittingly, these are called real estate investment trusts (REITs) and are managed by real estate investment professionals who will do the buying and selling for you.

Alternatively, you could buy a share in an exchange-traded fund (ETF) focusing on real estate. As the name suggests, these are pooled investment vehicles, listed on an exchange, which invest in stocks issued by REITs, companies that manage office buildings, hotels and other property.

Then there are the builders themselves. It’s a step away from claiming partial ownership of a property but you could access the industry through buying shares in the likes of a housebuilder or office block management firm.

It might not feel like it but cold hard cash can be considered an asset class of its own. Interest rates on cash only started to become attractive again after Covid, as central banks hiked their own interest rates in a bid to tame inflation. Before that, cash holdings generated either pitiful or no interest at all, as the same banks nailed rates to the floor in response to the global financial crisis.

If the interest rate you receive is higher than the rate of inflation, you are effectively generating a positive return. If your rate isn’t outstripping inflation, your money is losing purchasing power, even if it is making some interest. So, be careful that your money isn’t becoming less and less useful, even if it does look and feel the same.

It can be useful to hold a bit of cash on the sidelines to take advantage of any dips in the stock market but history shows us that holding cash for the long term is not the most productive way to make money. It may bring your investment risk level down but, as we said, falling victim to the eroding power of inflation is just as much of a risk.

Normally, anything outside of equities, bonds and cash is considered an alternative investment. But, with the rise in popularity of ETFs giving everyday investors access to commodity and real estate markets, the lines are starting to blur.

Private equity, venture capital, hedge funds and tangible assets like wine, whiskey, art and classic cars all fall into the alternative investment bucket.

A common reason to explore alternative investments is that they often move to the beat of their own drum, meaning their performance can differ meaningfully from stock and bond markets, helping with diversification. With different outside influences and niche strategies, in the case of some hedge funds, the goal is often to hold something uncorrelated to other portfolio holdings.

Be careful though, alternative investments can come with hefty fees, lock-in periods and carry their own unique risks. A vintage champagne falling off a warehouse shelf or an old Ferrari starting to rust are fairly distinct challenges and even if they’re in pristine condition, arranging a buyer in the end might be trickier than tapping the sell button on your Robinhood app.

Ask a dinner party what Bitcoin and Co. actually are and you’ll get a range of answers (as well as a guarantee of never being invited back). Is crypto a renegade protest against central banks? Is it the world’s new means of exchange? How about a purely speculative asset? Or maybe it’s a sure fire inflation hedge?

There are few assets that attract as much devotion and derision in equal measure. Whatever use case or level of utility you think the broader sector has, the reality is its huge price swings have drawn in investors in their droves over the past few years. While the jury’s still out on whether it can actually replace traditional currencies, the creation of Bitcoin ETFs and outright cryptocurrency holdings in large institutional portfolios show its status as an investible asset is strengthening.

One thing’s for sure, investing in crypto is not for the faint-hearted investor. Each coin is subject to the whims of its investor base, which can get excited or spooked by geopolitical events, changes to the outlook for inflation and sector hype. Tread carefully if you want to add crypto to your portfolio.

Index options are a versatile financial tool for engaging with the broader stock market. Unlike single-stock or exchange-traded fund (ETF) options tied to individual securities, index options derive their value from market indices like the S&P 500, Nasdaq 100 and Russell 2000. Whether you’re an investor or trader, you can potentially use index options to speculate on market trends, hedge portfolio risk or implement advanced strategies without directly buying or selling individual stocks, ETFs or their options.

When it comes to how you can invest in these assets, you can either invest in them directly by buying and selling a share or property, for example, or by putting your money into a fund. This way, your invested cash is pooled with that of other investors and allocated to a range of assets on your behalf.

The way in which this is all managed differs between the types of fund on offer. Here are some of the most popular styles of fund for everyday investors.

Exchange-traded funds (ETFs)

As we’ve mentioned above, an ETF is a basket of assets, commonly stocks, that is itself listed on a stock exchange. It has a buy and sell price and lets you access that basket through one holding that investors can buy and sell throughout the day.

Traditionally, ETFs have been used to track the performance of stock market indices like the S&P 500. This aim of matching the market instead of trying to beat it means there is little in the way of human management, keeping costs low.

It’s becoming increasingly normal to see different flavours of ETF pop up, though. Some do have fund managers and charge a higher fee for exploring a specific sector like artificial intelligence or clean energy.

If you are exploring ETFs, just make sure you know which is which and what suits you - the fund provider’s factsheets are a good place to start looking.

Investment trusts (investment companies)

Investment trusts, or investment companies, are similar to ETFs in that they are collections of assets in one vehicle, listed on the stock market for you to buy and sell. The big difference is that they genuinely are companies with boards of directors, and fund managers choosing which assets to buy and sell for the portfolio.

They are unashamedly actively managed and try to beat certain indices instead of matching their performance. Some particular characteristics are their ability to borrow money to invest in their stocks, which could enhance gains or increase losses, and their capability to hold back 15% of their yearly income to top up dividends when they are harder to come by - like during the pandemic.

There are more quirks to get to know but the main attraction is often trusts’ ability to invest for the long term, without needing to worry about investor flows prompting buys and sales in the portfolio.

Mutual funds (open-ended funds and unit trusts)

Here’s a type of fund not listed on a stock exchange. They are still baskets of assets you get to buy at the click of a button but there is only one daily dealing point and you buy straight from the fund provider or, as the modern investor tends to do it, on an investment platform or app. There are both active and passive (index-tracking) varieties and have traditionally made up the bulk of the UK’s pension assets, so you might already hold a few.

Whereas investment trusts have a set number of shares in issue, making them ‘closed-ended’, these funds create and redeem units as investors buy into and sell from them, making them ‘open-ended’.

They tend to charge higher fees than ETFs, which has seen their popularity drop at pretty much the same rate as that of ETFs has risen. Who still uses them, then? Well, as the world seemingly trends towards passive funds, active mutual funds still have their devotees who are willing to pay slightly higher fees for the potential to outperform the market. Investment trusts may suit here but platforms can levy transaction fees on them, which build up if you’re drip-feeding money into them monthly. As open-ended funds seldom come with a buy or sell fee, they can fit the bill.

Important information

When you invest your capital is at risk. Past performance is not a reliable guide to future gains. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.

This article is meant for educational purposes only. Make sure to do your own research on what investments are right for you before investing or consider seeking expert advice.

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