Which asset classes should be included in a robust portfolio? After you have decided on your long-term asset allocation between safe and risky investments, the next step is the question of which asset classes you want to include in your portfolio. The most important asset classes are stocks, bonds, real estate, gold, commodities and cash .
The term asset class is not clearly defined. It is used differently in the financial industry. An asset class basically combines securities or assets of the same type. However, some segments can be divided into a large number of sub-asset classes. A subset of the equities asset class is, for example, emerging market equities , i.e. shares in companies from emerging countries such as Brazil and China. Emerging market shares, in turn, can be divided into shares of large, medium and small companies or into individual sectors.
It remains to be seen whether such sharpened security categories actually deserve the designation of an asset class. In our opinion, the use of the term is justified when the characteristics of a security segment differ significantly from the characteristics of other asset classes. For example, if the returns depend on various factors and there is only a weak or negative correlation (correlation). Seen in this way, emerging market bonds, for example, are a separate asset class. It is true that these are bonds. Based on these premises, we have filtered out eleven asset classes from which every private investor can put together a portfolio. Safe investments stabilize the portfolio, riskier securities ensure the return. The use of less correlated asset classes improves diversificationin the depot. The financial industry speaks of “multi-asset strategies” or “multi-asset portfolios”.
Safe asset classes for stability in the portfolio
Call money: Low, variable interest, but available daily. No price fluctuations. According to daily money comparison calculator the currently best providers.
Fixed-term deposits: terms from three months to ten years. The capital is not available within the agreed investment period. Usually slightly higher interest rates than overnight money. Protection against bank failures through deposit insurance. No price fluctuations. You can find secure accounts with the highest interest rates in our fixed-term deposit comparison .
Euro government bonds: Short-term bonds from euro countries with a high credit rating are the safest securities for investors from the euro area. A failure is almost impossible and the exchange rate fluctuations are minimal. The longer the terms, the higher the potential price fluctuations in the event of changes in interest rates.
Riskier asset classes for returns
US Dollar Emerging Markets Bonds: Predominantly emerging market bonds. Good to poor credit rating. Significantly higher price fluctuations than euro government bonds, but less than shares. Equity-like return opportunities.
High-yield bonds: International high -yield bonds from companies with low creditworthiness (non-investment grade). More volatile than emerging market bonds. Equity-like returns.
Developed Countries Equities: Large and medium-sized companies from developed countries. High return opportunities, but also high price fluctuations. On stock market crash, losses of more than 50 percent are possible.
Emerging Markets Equities: Large and medium-sized corporations from emerging countries. Slightly riskier than developed market stocks.
Food stocks: International stocks of food and consumer goods manufacturers such as Nestlé and Unilever. The most recent four stock market crashes have shown themselves to be relatively stable.
European real estate stocks: stocks of companies that own real estate and earn their living from managing it. Low correlation to other asset classes. Price increases during the stock market crash at the beginning of the new millennium.
Raw materials: Well suited for diversification . But since 2001, returns have been poor on average. Relatively high risks and long dry spells. Between mid-2008 and the beginning of 2016, almost 47 percent loss.
Gold: By no means a safe bank, as many believe. No ongoing income like dividends and interest. High volatility and long periods of loss. But improves diversification in the portfolio. Relatively stable in crises.
Correlation, returns and risk of the selected asset classes
The lower the value, the higher the diversification effect. If less correlated asset classes are combined into a portfolio, the fluctuation range can be reduced with the same expected return. measured the correlations, returns and risks of the asset classes on the basis of indices that are representative of these securities markets. For some markets there are a large number of competing indices, for example for commodities, which differ significantly. In such cases, we have chosen the index that has performed best in terms of return and risk figures over the past 18 years. The performance of some asset classes may surprise some investors. Even safe euro government bonds produced a higher average annual return. It is specified by the asset class with the shortest time series. In the period under review, investors would have done better with a portfolio that had relied primarily on emerging market bonds and high-yield bonds than with stocks.