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RTC3: What are the four different asset classes · The Curve

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  Welcome to the Curve Podcast, a conversation for women who want to learn more about money,
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  their money for the future they want to have. We're all busy in the pursuit for financial
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  So today we're going to talk about the different asset classes. I love that I'm introducing it like
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  I'm going to be telling everyone, oh I've got a vague idea. I know that there's four,
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  and I feel like I know one is cash and one is stocks, but I don't. Do you want to leave this
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  episode? But yeah, if we can start from the beginning and have that broken down, that would be
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  awesome. Yeah, like asset classes, there's kind of four main asset classes. We've kind of touched
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  on a few, so there's stocks, which is like shares, equities, it's all the same thing. And that's
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  basically only a part of a company, right? Yes, yeah. So we'll get into that. But there's stocks,
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  bonds, cash and property. Those would be kind of the four different ones. And when we talk about
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  different asset classes, they're different because they move in different ways. They have different
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  drivers. They have different return and risk profiles. So you want them to four different buckets.
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  And so does that mean that some of them are less volatile and some are more volatile?
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  Yes. Yeah. So what can we do on order then of the least volatile to the most?
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  Yes. Okay. So the least is cash. And it's probably the easiest because everyone kind of knows
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  what cash is, cold hard cash, the lowest risk, also the lowest return. When we talk about cash,
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  we kind of talk about term deposits as well, because effectively, that's just cash in the bank.
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  So investing in cash is good for people with a very low at risk appetite. So like Granny,
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  like we mentioned before. Yeah. And it's just considered the safest investment, really.
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  The risk is low, but there are returns low. And that's why you're only getting 1% return.
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  What's another example of a cash investment then? There's obviously term deposit. What else is that?
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  Or is it just term deposit? No, there's term deposit. It's like anything like a cash investment can
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  be cash under your bed, under your mattress. You know, investing, you're just putting 100 dollars of
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  your salary away every month under your mattress. That's right. Holding cold hard cash. But I guess with
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  the lack of cash used now, it's cash in the bank, cash in your savings account, your checking
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  account. So it's essentially holding on to what you have without really growing it at all.
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  Yeah. And saying that's like really low return. Yeah. Okay. And something that you can access
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  instantly. True. Yeah. I mean, a term deposit you're sometimes actually you are usually
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  locked in for a period of three months, six months, 12 months. But with a checking account, for
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  example, I mean, I wouldn't even say that's investing because there's not 50 cents a month or
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  something. Yeah. It's not investing. You're just putting your money there and that's you're not
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  making it worse. Well, I guess if we're talking about like an asset though, like, you know, if you own
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  a stock or you own a house or whatever, you still own that money. It's just not growing in terms
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  of any kind of return, right? Exactly. And you have earned that cash and you own that cash. And when
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  you see a thousand dollars in your bank account, that is the value of your asset. Okay. This is
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  making sense. So cash is the least volatile and also the least return. Yes. Yeah. So what would be
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  the second? The second one would probably be bonds. And when they say a bonds a bit tricky to
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  understand, when I talk about a bond, these can also be called the same asset class can be called
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  fixed income or fixed interest. And a bond is you're effectively loaning money to a company to use
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  to grow or to use it. However they please give me an example of that. So usually it is, you know,
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  massive corporations. They're pretty safe. Would this be like Apple, for example? Yeah. Apple
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  yeah, it would be the like US government, the New Zealand government Auckland Council, you know,
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  maybe some of our utility companies in New Zealand. So very reputable companies.
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  Reputable companies that have been around for a long time, what we kind of call blue chip companies,
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  corporations, they would issue a bond. And with that, let's say it's a million dollar bond,
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  they need a million dollars from investors really. So you would say, look, I'll give you a portion
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  of that. And in return, because I'm lending you that money, I want to be compensated for that risk
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  that I'm taking. So therefore they will pay me a fixed amount, which is why we come back to
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  it called being called fixed income, which may be two, three, four percent. It's usually pretty
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  pretty low, particularly in today's world, not much higher than the likes of a term deposit.
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  And it's for a fixed period of time. So you know, if I'm lending this company $1,000 and I'm going
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  to get a 2% return, I'm going to get that 2% return either paid monthly or annually. And then
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  at the end of that loan period, you get that money back. The end of that period for that bond,
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  that what we call maturity date, you get that $1,000 back. So the return that you've made on
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  that $1,000 is the fixed income amount of two, three, four percent or whatever. And why is that,
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  because it sounds quite similar to what I thought a stock was, is there no risk that that company
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  could not give you your money back? There is a risk, I guess it's because this is kind of going
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  into a bit of a deeper topic, but it's because it's lower risk for the likes of me and you, because
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  if a business is going to go under, it's going to pay its debt holders, which is its bond holders,
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  the likes of you and me first, before it pays its equity holders. Okay. So you get priority if
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  the business is going to fail. You get paid first them before the equity or the stock holders.
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  So it's kind of, yeah, it's just a different way for a company to get money, to fuel growth
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  or whatever. There's just lots of different ways out there. One of them being on the stock market
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  and having investors by shares, another one is through a bond. And so obviously with the share,
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  the reason that it's more volatile and therefore the return could be greater is because it's not fixed.
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  It could go up, it could go down. And usually they're not investing in high risk things. So
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  for example, with the Auckland Council, like if you're lending them money, they're not making
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  huge risk investments with that money. And so therefore the bond that you're buying or the fixed
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  income investment that you're making is low risk. Okay. All right. Also cash bond is stock
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  next or is property. I would say property would be, would be next with us living in New Zealand.
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  Like properties pretty well understood in terms of investment. It's talked about all the time.
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  We have this weird fascination with everyone having to own their own home.
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  Right. It's like, oh, I'm engaged. Now it's time to buy my house. It's so right. Why don't they
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  own a property? Why don't they own a house? It's a much more conversational topic. So I feel like
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  people kind of understand it more, but it's still good to kind of put it in perspective of cash bond
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  stock property. So yeah, I would say it's more, it's definitely more risky than a bond and cash.
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  Oh, interesting. Yeah. So we're going from the bottom up. I totally would have thought that
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  property was pretty safe because things are, it's, it's hard because I feel like we've got this
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  warp perception that properties safe because of New Zealand. And we've been in, had a fantastic
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  property market that has only gone down like twice in the last 50 years. So we, and that's why it's
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  talked about so much because everyone has such a good story to tell of their property portfolios.
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  You know, there's kind of, it's talked about a lot. And even against this warp perception that
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  property isn't a risky investment. But I'll run through some of the benefits and some of the
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  downfalls running through the benefits is that you get a capital gain, which effectively is just
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  to change the price from when you buy it when you sell it. So you buy it for a million, you sell it
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  for 1.2. Totally. And that's where we've got this understanding that property is always going to go
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  up, particularly in my lifetime, it kind of has, but it feels less risky because so many people want
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  to buy houses and it's constantly kind of unstable. And we live in a country where everyone wants to
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  come live here, you know, we've got through COVID, touch wood, we, you know, we've got a politically
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  safe environment in country where people want to raise their kids, we've got, you know,
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  net migration, people want to live here. So there's all these drivers that are driving demand for
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  property, which are driving up house prices, that that capital gain that change in prices has
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  historically on average always been positive. But that can be a capital loss and that's when your
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  value of your property goes down. The benefits is that the return consists of two things, it consists
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  of your capital gain, but also your rental income. So if you get tenants in there and they pay you
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  rental income, that's also a return on your investment. So you've got that kind of double whammy.
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  Yeah, of course, because if you're getting people that are paying more than what you would pay for
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  your mortgage, then you're getting money on top of that as well. Totally. And that should be calculated
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  in your return when you're kind of considering buying property. Another benefit is leverage. So leverage
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  effectively just debt or mortgage. Bear with me, I was given an example. So say for argument,
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  say you could buy a house for $1,000. You had that full of $1,000, I wish that was the case,
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  open house prices, $1,000,000. You'd buy a tent for $1,000. So say you had you wanted to buy a house
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  for $1,000, you had $1,000 that you could just pay for it outright, you didn't have to get leverage
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  or mortgage, whatever you want to call it. Fast forward 12 months, that house is worth $1,200.
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  It's gone up 20%. You've made 20%. What's that back? Which is $200. Yeah, yeah. Now let's do
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  a scenario where you've used leverage. You want to buy the same house for $1,000, but you only have
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  $200 of savings. So you need to go to the bank and borrow that $800. So you're leveraging that
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  purchase. You're getting debts to fund that purchase. You're borrowing $800. Fast forward 12
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  months, that house has gone up 20%. Same as the previous scenario. So that house is now worth $1,200.
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  But the bank still just wants its $800 back. It doesn't really care about the return that you've made.
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  It's a fixed amount. It's a fixed loan amount. We won't get into details of mortgage
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  repayments and all that. But for argument's sake, you're 200. You've actually made 50%.
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  Your $200 has now gone to $400. Why? Because the difference, if you go $1,200,
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  minus $800 is $400. Because it's almost overindexed the amount that you have generated
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  in terms of return because the bank doesn't want any of that 20% of the total house price.
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  You've effectively been able to pocket all that gain. You've been able to pocket that whole
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  $200 gain by only putting down $200. Whereas in the previous example, you put down $1,000.
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  You still pocketed that whole gain of $200. But it was on $1,000. So the percentage-wise,
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  it's a lot smaller. One of the benefits is the leverage. That just means that it exacerbates
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  your return that you can get. It makes your return you can get a lot greater. But also,
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  one of the pitfalls or the downfalls is that that can work in reverse. If the market falls,
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  you cop the whole loss. The bank that gave you the leverage or that gave you the mortgage.
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  They still want their money back. So it works on the upside and also on the downside.
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  Just one more thing. The benefit of property is that people just love being able to see what they
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  own and the tangibility of their asset and being able to live in their house and touch the wall.
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  Exactly. So I write. Sit on the ground, sit on the chairs and tape. Whereas when you buy a
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  stock or a bond or even cash in the bank, it's not actually a tangible thing and it's just a number
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  on a screen or whatever. And it's kind of this, it's very kind of looser for you as very
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  looser. So yeah, people just like having that tangibility. The flip sides and one of the downfalls
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  also property is liquidity. So that just means being able to get in and out. Yeah, with a stock,
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  you can sell it instantly. It's priced daily. Whereas if you needed the money from your property and
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  you needed to sell it really quickly, on average, it takes like 90 days, you know, three months
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  to get that money. And that's a few to sell goes well, right? Totally. So just having your money tied
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  up in property can be also quite risky. But in terms of the risk return spectrum that we're kind
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  of talking about with these asset classes, you've got cash on the left, then you've got bonds,
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  then you've got property, and then you've got shares on the right hand side. I mean, we could talk
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  for hours on this part. The most risky, but the highest return out of these four different asset
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  classes would be stocks. And when I say stocks, I mean shares, stocks, equities, whatever you want to
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  call it, people talk about all these different terms, but they just mean the same thing. So a stock,
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  a share, an equity, owning a tiny part of a company, right? It's all the same thing. It's a
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  different name. And it effectively means you're a tiny shareholder in a company. So you share in
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  the growth of those profits, your part owner of a company, which may seem weird. You're like,
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  a bank, she has an apple, but does that make me do I own apple? Well, you do. Like you are a part,
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  you and a billion other people, but you own a part share of apple. And so you want to make sure that
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  when you're investing in shares, you're investing in a company that's going to grow and something you
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  believe in, whether it's totally something that you can see those profits are going to grow
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  because that's what you're going to be sharing in the success of. Exactly. Yeah.
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  I love the way you explain that, that you're sharing in the profits of something. It makes kind of
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  makes sense why you own it and therefore you're sharing in the money that they also make. Yeah.
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  And something maybe a bit closer to home, it's like if you invested in your friends, fashion
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  label, you were investing in them because you could see it, you could see the success it's
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  going to have. You believe in that success and the profits that are going to come from that.
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  And you want to be a part of that story. And that's effectively what everyone's doing every day
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  in a stock market. They're investing in companies. They believe will grow and that they can share
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  in those profits. You can also start investing with nothing. Like you don't need. You do five
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  dollars towards something. Totally. Whereas investing in property, you need like 200,000. It's like
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  it's just crazy. That's like pretty unobtainable for a lot of people. So the fact that you can invest,
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  you can be a shareholder for, yeah, as little as 5, 10, $50 is pretty cool. But then I guess you're
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  right in terms of the vitality that you can also lose all of that immediately. So that's why it's
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  the riskier. That's why it's the riskier is because coming back to let liquidity argument,
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  with shares that they're priced daily, that they move up and down. Sometimes a lot,
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  like if we looked at what happened at COVID when the market fell 30%, you know, a lot of people,
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  that's a huge loss for a lot of people and that's the risk you're kind of taking when you're
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  investing in stocks is that you can lose kind of a hundred percent. Obviously different companies
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  have different levels of risk. Like we came back to the biotech example and the supermarket example.
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  But at the end of the day, yeah, there is a lot of volatility and a lot of risk and a lot of
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  uncertainty when it comes to investing in stocks. But you are aware of the surgeon, right? You're
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  the surgeon. On average, you're compensated for that return in the long run. And that return comes
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  in the form of similar property, you get the change of the price, which is the growth. So i.e.
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  you bought a stock for a dollar and then by the time you sell it, it's a dollar 20 or something.
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  But with a lot of companies, you can also get a dividend, which is like, which is kind of like
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  rent-win come. I didn't even realize that. So they can pay you on top of that price difference.
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  So yeah, so you can get dividends and you can get the price gain. So income and growth is kind of
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  what we call it. We're going to more detail with this in another podcast, right? Exactly.
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  Because my brain is setting up. So yeah, so you've got cash, then bonds, then property, then stocks.
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  Okay, so those are asset classes and the reason that there are different buckets or sections is
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  because some are less risky and then some are more risky. And they're kind of clumped together,
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  right? And the drivers, the supply and demand drivers that move each of those asset classes
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  is different. We're going to come into another discussion on diversification, but that's why
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  you should, if you can, invest in different asset classes to spread to your risk even further.
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  In terms of what we're going to go into next episode, are we basically going to focus quite a
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  lot on diversification? Yeah, so we're going to talk about why investing is for the long term is
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  so important and also diversification. Kind of one of my favorite topics of finance.
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  You talk about this a lot. Yeah, yeah, it's really, it's just so important and it's a natural flow
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  on after talking about the different asset classes. I guess when you understand the different
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  asset classes, it makes sense to then think about different places to put your money rather than
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  the one thing that makes sense to you. Exactly. And why we should be investing in the different
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  asset classes. It's kind of about why we shouldn't have all our eggs in one basket.
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  If you drop all the eggs, you've got nothing for breakfast. Exactly, you go hungry.
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