Saxo Group
Different shapes and sizes
Vehicles come in all sorts of shapes and sizes and are designed for specific uses. A sports car is small and light. It accelerates quickly and has nimble handling capabilities. A semi-trailer truck is large and powerful. It is far from quick and nimble, but it is capable of carrying large loads of cargo from place to place. Vehicles all have their own set of characteristics. The same is true for investments. Different investments or asset classes have their own set of return, risk and payout characteristics.
The big three
Cash Equivalents
We are not talking about the paper bills and metal coins type of cash. Cash investments earn a small guaranteed return over a short investment time horizons. We typically think of these assets as risk-free although they technically could lose money. This could be a savings account that earns a small amount of periodic interest, a certificate of deposit or a short-term treasury bill.
Bonds
Bonds are loans. If the loan is to a government, it’s a government bond. If the loan is to a corporation, it’s a corporate bond. When you buy a bond directly from the issuer, the price paid is the loan or principal amount. The bond holder will receive periodic interest or coupon payments over the course of the bond’s life. At the end of the bond’s life the holder will receive the final interest payment and the full loan amount. After issuance bonds can be traded in the market. Bonds are a medium-risk asset with income and some potential for price appreciation. Bonds are also referred to as fixed income.
Stocks
Stocks represent ownership in a company. The amount of the company owned is proportional to the number of shares owned. If you own 10% of the total shares outstanding, you own 10% of the company. As a shareholder, you’re intitled to your portion of the after-tax profits or earnings of the company. Earnings may be paid out to shareholders in the form of dividends or retained by the company. Stocks are a high-risk asset with a potential for some income and a greater potential for price appreciation. Stocks are also referred to as equity.
Other asset classes
Real estate
Property such as office buildings and apartments.
Commodities
Real assets such as gold, oil and lumber.
Private equity and venture capital
Similar to stock but not publicly traded.
Derivatives
Financial instruments linked to an asset you may or may not own. For example, you could agree to pay us the difference between the current price of an asset and the price of that asset in three months’ time.
Mutual Funds
A mutual funds pools money from multiple investors. This money is invested and professionally managed by professional investors for a fee. This money can be invested in stocks, bonds, combinations of stocks and bonds, etc. Although you pay a fee, mutual funds are an easy way to hold a well-diversified portfolio of assets.
ETFs
ETF stands for Exchange Traded Fund. They are very similar to mutual funds with a few exceptions. Mutual funds are only traded at the end of the day, but ETFs trade throughout the trading day just like stocks. ETFs usually passively invest in an index. Mutual funds can be passive or active.
See Table – Understanding Asset Classes – A graphic would be nicer than the table, but this is the necessary verbiage.
| Asset Classes | |
| Cash | Money earning interest |
| Bonds | Loans to others |
| Stocks | Ownership in companies |
| Real Estate | Property |
| Commodities | Real assets |
| Private equity | Non-public ownership |
| Venture capital | Non-public ownership |
| Derivatives | Linked to assets |
| Mutual funds | Diversified pools of investments |
| ETFs | Diversified pools of investments |
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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