Diversify Your Assets among Different Asset Types to Preserve Your Portfolio Value
by Shane Flait, ©2008

Allocating our wealth among different asset categories helps maintain its value in the face of downturns. A variety of asset types make up all investments.

Typical examples of asset types are:  Equities, Debt, Real Estate, Gold and Cash

·         Equities represent ownership in companies in the form of stocks. They can appreciate or depreciate in value.

·         Debt represents loans from companies or municipalities. They take the form of bonds and generate interest and return principal at maturity.

·         Real estate represents ownership in buildings and land – a limited asset. Real estate values can decrease but over the long run they generally appreciate. Real estate can generate income as a rental unit. Supporting real estate requires both a significant investment to purchase (equity) and borrowing ability (mortgage loan) to help.

·         Gold has value since there’s relatively little of it and people find comfort in owning it as a safe store of value in uncertain times for future conversion to something else.

·         Cash represents the most liquid of holdings. It generates little earning but allows for ready purchases without jeopardizing profits in other, less liquid assets.

Generally, all assets don’t move in the same direction at the same time under changing market conditions. In fact, it’s rare if they do. And some have varying cycles or ups and downs in time too. When the stock markets are in a prolonged rally, gold and property won’t generally undergo an upturn at the same time. When stock markets are in a bear market, other assets will not necessarily decrease also.

Unfortunately, it’s impossible to predict what asset category is going where at any one time. Diversifying your portfolio among many asset types helps to improve your chances of achieving your long-term goals with a minimum of negative fluctuation in your overall portfolio. A decline in any one asset can be partially offset by other assets not undergoing the same trend.

The mix of investments, as shown in the figure, can give reasonable growth results and protection from severe downturns. As an example, rising inflation can be a negative for stocks in the short-term, but can lead to a rise in gold prices or real estate as investors move from currency denominated assets to 'real' assets.

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com