How to find the right asset class

Anyone who wants to invest is faced with a wide range of investment opportunities: equities, bonds, investment funds, structured products and many more.

Investors are spoiled for choice when it comes to selecting the right investments to suit them. The possibilities offered by the financial market are as individual as the needs and wishes of investors. Before investing a portion of their assets, potential investors should consider the following points, among others:

• Goals and needs: what financial goals do you want to achieve with your financial investment? What needs are you aiming to cover?
• Risk appetite: what risk are you prepared to accept and can you take responsibility for it?
• Investment horizon: over what period of time can you and do you want to invest?
• Frequency: would you like to invest capital on a regular or one-off basis?
• Values: are there companies or industries that do not correspond to your values?

The world of investments is huge, and the characteristics of individual classes are very different. The most important asset classes, referred to as core asset classes, are:

• equities
• bonds
• currencies
• alternative investments (e.g. commodities and real estate)
• investment funds

Investments can also be further subdivided within a class.

Equities are securities issued by stock corporations, i.e. companies. Anyone who invests in the equities of a company buys shares in that company. Shareholders are entitled to income in the form of dividends, provided the company is successful enough to distribute them. Most of the companies in which investors can buy shares are listed on the stock exchange. The value of a share is therefore reflected in the (daily) current price. This means that investors can also make a price gain if they sell their shares at a higher price than the price at which they bought them. Compared to bonds, share prices are more volatile. They react more to events on the market. For this reason, equities generally carry a higher risk than bonds, but they also offer higher earnings opportunities.

Bonds: investors become lenders

Bonds can be issued by companies, but also by state institutions. In contrast to equities, bonds do not give investors a share in a company, but instead represent a loan granted by the investor to the issuer of the bond (issuer). In return, the investor receives regular interest (coupon), then at the end of the term, they get the capital they had paid in back again. Details concerning the date and amount of the repayment, and the interest that investors receive when, are recorded in the bond. The creditworthiness of the issuer and the situation on the capital market influence the amount of the coupon. For example, if you hold a bond issued by the Swiss government (federal bond), where the risk of credit default is extremely low, you will receive very little interest. Interest can be fixed or variable. Fixed interest rates, as the name suggests, are fixed from the outset, i.e. a bond that always bears interest at a rate of 3%, for example. These bonds are called fixed-rate bonds. Variable-rate bonds redefine the interest rate with each coupon payment. The interest rate is calculated as a premium (spread) above a benchmark interest rate (e.g. the Libor). Währungen: Geld parkieren mit Fest- oder Callgeld

Currencies: parking money with fixed or call money

What should you do with the money you have available but don’t want to tie up in equities or bonds in the long term? Besides a savings account, money market products are an option here, for example in the form of time deposit accounts or call money. Investors place a liquid amount with a bank, for either a fixed or an unlimited term. At the end of the term, the borrowed money is repaid with interest. If the money is lent for an unlimited period of time (call money), there is a variable interest rate.

Alternative investments: investing with greater risk and preserving opportunities for higher returns

If you are looking for higher returns on your investment, alternative investments may be an option worth considering. Unlike the above investments, alternative investments are nontraditional investment instruments. These include, among others:

• hedge funds which allow you to bet on rising or falling prices
• private equity, a form of investment in which you invest directly in unlisted companies that have growth potential
• commodities such as gold, oil or wheat
• real estate, i.e. houses and apartments
• art

Alternative investments are more suitable for advanced, active and well-informed investors, as they are usually associated with higher risk. Nevertheless, they can be a promising addition to your investments.

Direct investments vs. indirect investments in an investment fund

Another investment option is offered by products and investment solutions that include a mix of investments. These are investment funds, for example: investors who invest in an equity fund or index fund thus hold shares in various companies via investment funds. An investment fund called Large Caps Switzerland, for example, contains shares in various large Swiss companies, while a Global Commodity Fund could contain shares in worldwide companies which operate in the area of commodities. But there are not only equity funds: investment funds can contain any mix of equities, bonds and money market products, or even invest in other funds. An Exchange Traded Fund (ETF) is traded on the stock exchange and represents an index. Another special form of investment is the mandate. In the case of traditional mandates, the asset manager puts together a personal portfolio that combines different asset classes according to the investor’s investment profile.

Combine asset classes, increase diversification

If you want to invest wisely, you should proceed strategically. Firstly, the individual risk profile and investment horizon are clarified. An investment portfolio is then put together accordingly, combining various asset classes as well as sub-asset classes. In this way, your own portfolio is diversified as broadly as possible and risk concentration is reduced. For example, an investor who only holds shares in large Swiss companies takes a higher risk than an investor who holds shares, bonds and money market investments from different countries and regions, in different currencies and from different sectors, and thus has a diversified portfolio.