Defining the Asset Classes … When it comes to investing your hard-earned dollars, you have to decide how much you want to invest and where to invest it. To choose wisely, you need to know what choices you have and the risks associated with the investments you choose. There are four basic investment categories: shares, property, fixed interest and cash. You can invest directly in any or all of them, or indirectly, by buying managed funds. There are many different ways (vehicles) to invest in these asset classes. For example, if you are saving for your retirement, you can investment in these asset classes through an employer sponsored superannuation fund or by setting up your own personal or self employed super fund. On the other hand, if you are retiring, then you may choose to invest in the above asset classes through an annuity or roll over vehicle such as an deferred annuity or allocated pension which offer certain taxation advantages.

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Stocks- A share of ownership in a corporation. Risks and returns vary depending on the economy, political scene, the company's performance and other market factors.

Bonds- An IOU issued by a municipality, federal government, or a corporation. Generally, interest is paid by the issuer until the maturity date. At maturity, the issuer pays the face amount of the bond.

Cash equivalent investments include:

Cash Management- A fund usually invested in very short term bank bills, money market or cash type securities. They are typically safe and liquid investments.*

Term Deposit- Fixed for a predetermined period, interest-bearing investment with a bank or building and is considered normally as a low risk investment.

Passbook Savings- A bank savings account which generally provides a very low rate of return.

Managed Funds- This has become a very specialised sector of the financial planning industry with fund managers now offering hundreds of managed funds to choose from.

A managed fund contains a mix of investments that may simply include only one asset class or many asset classes such as shares (local and overseas), properties, interest-bearing deposits and cash equivalent investments. The fund is managed by a professional fund manager and has a stated objective or investment style. The objective of high growth managed funds mean that their assets generally consist of investment in shares, some of which may be high-risk. Others may invest in more stable shares (blue chips), as well as bonds, while still attempting to beat inflation. Always check the objective of the managed fund, and read the fund's prospectus, to make sure it's consistent with your goals and SEEK professional financial advise before making your final decision.

A good place to search for independent information on a managed fund, including it's performance history and how it compares with similar investments of its asset class, is through a fund rating service such as Morningstar®.

Stocks offer both risk and reward

Stocks are shares of ownership of a company. A company can raise money for start-up or growth by selling shares of its stock. The two main types of stock are common stock and preferred stock.

Common stock is the most basic form of ownership in a company-it typically gives shareholders the right to vote on issues and a percentage share of ownership. For example, if you own one share of common stock in a company that has 100 shares, you own 1% of the company.

Preferred stock usually does not offer voting rights, but owners of preferred stock are generally entitled to dividends (the company's profits distributed in cash) before common stockholders. Preferred stockholders generally receive dividends at specific times and in predetermined amounts, whereas common stockholders may or may not receive dividends based on company profits.

Government Bonds are like IOUs

When investors buy bonds, they are actually loaning money to the government or a company. Bonds are issued for a set period during which time interest payments are typically made to the bond holder. The amount of these payments depends on the interest rate established by the bond issuer when the bond is first sold. This is called a coupon rate, which can be fixed or variable. At the end of the set period, or maturity date, the bond issuer is required to repay the original loan amount (or the par value of the bond).

Bonds are generally a more stable form of investment than shares, and usually provide a more steady flow of income. Their stability typically means that their long-term return will be less than that of owning shares, although it might be greater than the investment return on a particular share.

What about cash?

If your goal is to protect your original investment and to have access to your money, consider cash equivalent investments like passbook savings accounts, money market funds, cash management accounts, term deposits with major institutions. Investments like these usually deliver stable rates of return. But the returns you receive after taxes are paid can often be low and might not keep pace with inflation. A passbook savings account or cash management account will provide you with access to your cash and generally provide more short-term security. These investments can be ideal in forming a liquid component in an overall investment portfolio. However, they are not designed to build wealth to meet long-term investment goals, like saving for retirement over the next 20 years.