What asset classes should I invest in?

Published by Rachel Lacey on 12 February 2014.
Last updated on 07 May 2014

Coins and chessboard

So what asset classes should you be considering?


Cash on deposit should be the starting point for every investor – aim to have three to six months' expenses in an instant access account for emergencies. Longer-term cash holdings can be held in fixed-term accounts spanning from one year to five or more. Typically the longer you can tie your money up for the better the interest rate you'll get.

Cash is the lowest risk asset class, in so far as you are paid a pre-agreed rate of interest and you won't physically lose any money. It is also protected in case your bank goes under, thanks to the Financial Services Compensation Scheme (to the tune of £85,00 per person, per financial institution).

However there is a big 'but' - interest rates are at rock-bottom and are likely to remain low for some time. This means it's hard – if not impossible – for your money to keep pace with inflation and so over time it's spending power will reduce. So while cash might be perceived as safe, it's not a risk-free investment.

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Fixed-interest securities

Moving up the risk spectrum we come to fixed-interest securities – these are essentially loans or IOUs made by investors in return for a fixed rate of interest. Loans to companies are known as corporate bonds while loans to governments are known as gilts or government bonds.

The risk, from an investor's point of view, is that the organisation receiving the loan may default on repayments. This means that the greater the risk of default, the higher the rate of interest you'll receive.

While bonds are typically regarded as higher risk than cash and lower risk than stocks and shares, there is a huge variance of risk within the market. Gilts are considered the lowest risk – as a government is unlikely to default. Within corporate bonds you can opt for safer investment-grade bonds, or riskier, but better paying, high yield bonds where there is a greater risk of default.


Providing the opportunity for income and capital growth, property has the potential to be a lucrative investment. And, because its performance is not linked to the stockmarket it can be a great diversifier. Some investors choose to buy residential property to let out – an investment known as buy to let. It can be expensive to buy and costly and difficult to manage however.

Commercial property investments can be easier to access – funds exist that specialise in the sector, buying up a portfolio of properties including industrial, retail, office and entertainment spaces; and the rent paid by the tenants provides a reliable income stream for investors. Leases are also much longer than those on residential properties too, reducing risk and increasing stability for investors.

When you purchase shares you are literally buying a stake in a company listed on the stockmarket. Along with your stake in the firm you also get shareholder rights, including the ability to vote at annual general meetings. The value of the share will rise and fall in line with the fortunes of the company in question. The price of the share will be influenced not just by the physical value of the company but by sentiment too.

Prices tend to rise on the expectation of good news and fall on publication of bad news. In addition to growth in the share price, investors may also enjoy an income stream in the form of dividends – which is a distribution of profits among shareholders.

Share-or equity-based investments are regarded as the highest risk asset class, although of course some shares will be riskier than others.

Asset allocation

Just how much money you invest in each area will depend on your attitude to risk. Cash and fixed interest are at the lower end of the risk spectrum, so cautious investors may want to keep more of their money in these asset classes, while those who can afford to take more risk should be favouring stocks and shares.

Suggested portfolio mixes, according to risk profile:

High risk
30% UK shares
40% international shares
20% fixed interest
10% property

Medium risk
25% UK shares
25% international shares
40% fixed interest
10% property

Low risk
15% UK shares
15% international shares
55% fixed interest
15% property

Source: Chase De Vere

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