In a (Asset) Class of Their Own

Let’s get to the point on this one.

The world of investment management is b****y daunting and unwelcoming for any novice investors out there.

I’ll let you into a little secret however … the finance industry likes it that way 🤯

The fact it’s perceived with such untouchable prestige and is able to strike fear into the hearts of many is the very same reason why fund managers can afford flashy offices in the heart of London.

And it’s the reason you gladly pay their exorbitant fees to try to grow your money.

They’re the experts right? 🤓

They know what they’re doing? …

Money’s not your bag (I get it).

But that doesn’t mean you shouldn’t have a basic understanding of the fundamentals.

It’ll really help you to work out whether you’re being taking advantage of when it comes to the professional management of your money.

Let’s take a step back.

Why bother investing your hard earned pounds and pennies in the first place?

The answer is a simple one folks: I call it the Terminator of Wealth.

Others prefer the more common description – ‘inflation’.

Inflation ravages the value of your money.

A pound today is worth a lot more than a pound tomorrow.

This means if your money is still going to buy you a pumpkin-spiced-latte-with-cinnamon in a years’ time, then you need to be doing something clever with your money to maintain it’s value.

Crucial point people (and 95% of the investment management industry will hate me for this one) …

Clever doesn’t mean complicated.

When it comes to investing your money you just need to understand that there are 4 asset classes you need to be aware of.

Backup, backup – so what’s an asset class?

An asset class implies an assortment of investment vehicles with similar characteristics and behavior in the marketplace

My definition:

A way of grouping investments that typically behave in similar ways.

The investment management industry excels in selling you convoluted investment products that promise the earth, and often under-deliver when factoring in their eye-watering management costs.

When you strip them back to their fundamentals, these ‘next best thing funds’ are all rooted in the same 4 asset classes.

But to admit the inherent simplicity wouldn’t go hand in hand with their suave client handouts, containing more charts and graphs than Canva.

And here they are:

  1. Cash
  2. Fixed Income Securities (also known as Bonds – and no not James, or Premium a la NS&I)
  3. Property
  4. Equities (i.e the companies we all purchase products and services from)

Each of these asset classes typically has their own risk and return characteristics.

Broadly, as you move from 1-4 you can expect the volatility of your investment to increase, but the return prospects also to increase.

A key point here is that volatility isn’t something to be feared.

Volatility is a good thing.

It’s the cost of harnessing the value of long term wealth creation via the stock market.

➡️ In other words, if you’re going to be investing in the stock market (in the great companies of the world) you need to accept that sometimes things will go up.

And sometimes things will go down.

But in the long term, history has rewarded investors… handsomely.

The issue then presents: what’s the optimal mix of these asset classes to hold? How can you maximise your returns whilst minimising your risk?

If I knew the answer to that one folks, then I’d be writing this from a permanent residence in the Bahamas (in fact would I even be writing it at all?!)

Another secret that our industry doesn’t want you to know, is that predicting the movement of asset classes is nigh on impossible.

What presents one year as a stellar asset class can quickly descend into the gutter the next.

Don’t believe me?

Check out this patchwork quilt.

It ranks the best performing asset classes from best to worst in each calendar year from 2008 – 2022.

Credit: JP Morgan’s Guide to the Markets

Can you see the pattern?

Look closer…

Okay I’m messing with you.

There is no pattern.

And this is the key point I want you to take away from this edition’s ramble.

Stop trying to second guess an already incredibly efficient market.

Sorry to be the one to tell you this, but neither you (nor your pinstriped suited investment manager) are smart enough to outperform the market.

What you DO need to know:

  • When it comes to investing, there are 4 asset classes to be aware of. The rest is just glossy marketing and waffle designed to mask high management costs 💰
  • You need to understand the fundamental economic profiles of each asset class (read – risk/reward characteristics) and work out how that fits into your wider life goals and plans 📈

If you do want to learn more about how each asset class behaves, then check out this episode of my podcast.

The chat perhaps isn’t the most riveting, but the impact it may have on your life is.

Future you will thank you for listening.

So there you have it.

You should now be fairly well-versed on the fundamentals of asset management.

Next time you encounter a ‘dream investment opportunity’, approach things with a touch more healthy scepticism.

I’ve made a career out of it.

Until next time.


Benjamin Mitchell

Benjamin Mitchell

I’m a chartered financial planner that can help you plan for tomorrow and also live for today.

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When it comes to money, we put your goals in life first. No jargon, no sceptical recommendations...
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