Investments can be categorised into specific asset classes according to a range of factors such as:
- the type of investment (shares, property or bonds)
- whether they provide potential income or capital growth, and
- the risk/return profile of the investment.
Generally, asset classes fall into 2 main categories:
- defensive assets, or
- growth assets.
A diversified investment portfolio should include asset allocations across several asset classes, and should include both defensive and growth assets.
Defensive assets generally offer lower risk and lower returns over the longer term. A portfolio weighted towards defensive assets may suit short term investors or those wanting to reduce the risk of market volatility.
Defensive assets include cash and fixed interest investments.
Growth assets provide the potential for longer term capital gains, but have a higher level of risk over defensive assets, especially over the shorter term. A portfolio weighted towards growth assets may suit investors seeking capital gains over the longer term and who are willing to accept an increased risk of volatility over the short to medium term.
Growth assets include investments such as Australian shares, international shares and property.
Defensive asset classes
Defensive assets include:
Interest paying investments such as savings accounts and term deposits. The principal invested is guaranteed with interest payments calculated in line with official cash rates.
Includes government, semi-government and corporate bonds. They offer a regular income with low to medium risk, depending on the issuer. Some fixed interest investments may also provide capital growth.
Learn more about fixed interest investments.
Growth asset classes
Includes companies listed on the ASX. Australian shares offer longer term capital growth and potential regular income through dividends. Australian shares may experience volatility over the short to medium term, with potential for capital growth and higher returns than defensive assets over the longer term.
Includes companies traded on international stock exchanges including many household names not listed on the ASX. International shares offer increased diversification over investing only in Australian shares. However, investors risk increased volatility due to rises and falls in international sharemarkets and currencies.
Direct property investment
Includes residential, commercial and industrial properties. Direct property generally offers lower risk than shares and a regular income through rental returns with capital growth potential. Higher purchase prices for direct property investments may reduce portfolio diversification.
Indirect property investment
Includes trusts investing in residential, commercial and industrial properties. Listed property trusts (LPTs) offer greater diversification across a broader range of assets, including properties usually too expensive for individual investors to purchase directly such as shopping centres, office towers and factories. LPTs can be traded on the ASX.
Learn more about asset classes in our investment approach