Asset classes group investments that are similar in terms of risk, return, liquidity, and market sensitivity. The main ones are stocks, bonds, currencies, real estate, and precious metals, each with its own advantages and disadvantages. Diversifying your portfolio by spreading investments across these classes is essential to reduce overall risk and optimise returns, tailored to the investor's goals and risk profile. We present the main asset classes and provide examples of secure diversification combinations.
The liquidity of a stock refers to how easily it can be bought and sold on the market, determined by the volume of transactions and the presence of buyers and sellers. Liquidity is generally higher for stocks on major stock markets, such as the SMI in Switzerland, which in turn influences the stock’s price and return.
The return on a stock is unpredictable and uncertain. It can be very high if the company performs well and the market is favourable, but it can also be zero or negative if the company faces difficulties or the market is unfavourable.
The risk of a stock is the probability that the investor may lose all or part of their invested capital. It is linked to the stock's volatility, which refers to the extent of its price fluctuations on the market. This risk is also influenced by factors such as the quality of the company, its industry sector, financial situation, strategy, governance, and more.
The liquidity of a bond refers to how easily it can be bought or sold on the secondary market. It depends on the size of the issuance, the frequency and volume of transactions, and the transparency of the market.
The higher the issuer's default risk, the higher the offered interest rate. The interest can be fixed or variable, depending on the type of bond.
This risk is associated with the likelihood that the issuer may fail to repay the principal or interest. The risk is measured by the credit rating assigned by specialised agencies (e.g., Standard & Poor’s and Moody’s). The higher the rating, the lower the risk.
The liquidity of a currency investment refers to how easily and quickly it can be bought or sold on the foreign exchange market, depending on the volume of transactions. The foreign exchange market is the most liquid in the world, with average daily trading exceeding USD 6.5 trillion.
This depends on the fluctuation of the exchange rate between the currency held and the reference currency (usually the currency of the investor's country of residence). The return on a currency investment can also be influenced by inflation, the interest rate paid in the currency, or the balance of trade of the countries involved. Over time, the most stable currencies tend to attract more capital.
The risk of a currency investment is linked to the uncertainty surrounding future exchange rate movements, which can be influenced by numerous economic, monetary policy, or geopolitical factors. For example, a financial crisis, a war, or a central bank decision can trigger major fluctuations in exchange rates.
The liquidity of real estate is often limited by the time required to find a buyer or tenant, as well as by transaction costs. Therefore, it is generally lower than that of other financial assets.
It corresponds to the income generated by real estate, in the form of rental income, capital gains, or dividends paid by a real estate fund. The return on real estate depends on the quality, location, and demand for the property, as well as market conditions.
The risk of real estate is associated with price volatility, rental vacancies, maintenance costs, interest rate conditions, particularly through mortgage rates, taxes, and regulations. Real estate risk is generally considered lower than that of equities but higher than that of bonds.
Precious metals are liquid assets that can be easily traded on international markets.
Precious metals tend to perform well over the long term, especially during times of economic or political crises or monetary shocks. They provide protection against inflation, currency devaluation, and loss of confidence in the financial system. However, these assets do not generate interest or dividends.
Precious metals are subject to market volatility and fluctuations in supply and demand. They can experience significant short-term corrections, influenced by geopolitical events, speculation, or central bank interventions.
However, there are some general principles to follow to build a diversified portfolio that can effectively withstand market fluctuations.
In your strategy, focus on assets with low correlation to each other, meaning they don't respond in the same way to events. This diversification within the market adds even more robustness to your investment. To better protect yourself against stock market fluctuations or currency depreciation, you can add currencies or precious metals to your portfolio. However, keep in mind that a single position should not exceed 20% to 25% of your total account.
How should you proceed if you want to invest in one of the five asset classes, but you’re unsure about which companies, bonds, currencies, properties, or metals to choose? In this case, purchasing shares in investment funds can be an excellent solution. A fund is essentially a "basket" that contains dozens, or even hundreds, of underlying securities. By buying a share in an equity fund, for example, you spread your risk across all the stocks within that fund.
There are several investment solutions available, and new products are constantly emerging on the market. This is why at Piguet Galland, we are here to help you develop the best investment strategy. Our advisors are at your disposal to offer you 100% personalised solutions at every stage of your life.