Investment planning – Understanding Asset classes


By Tkay Nthebe

Let’s be honest – everything about investing is not easy or simple. It is about understanding the trade-off between the risk you are willing to take, the expected returns and deciding whether to buy or hold investments, especially when things go wrong. It’s also comes with second guessing whether you’ve made the correct investment decision.

The biggest take away from the booking I’m currently reading – The Psychology of Money by Morgan Housel is a paragraph that reads as follows: “Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt and regret – all of which are easy to overlook until you’re dealing with them in real time.”

In this week’s article, I want to delve deeper into the different asset classes to choose from (refer to last week’s article titled “(Investment planning considerations”) when making investments decisions, which I discuss below.

  1. Cash

It is often said that “cash is king” and I agree. For investors looking for short term (not longer than 24 months) investment instruments, that do not have too much risk and can be liquidated quickly– choosing cash as an asset class makes sense. Given that the investment term is short, the interest on these instruments will also be much lower than other asset classes. Examples include savings accounts, notice accounts or Treasury Bills.

  • Bonds or Fixed Income

The second asset class is Bonds, which are medium debt securities issued by Central Banks or corporate organisations. The risk is slightly higher than cash, but relatively still moderate. Bonds are suitable for investors willing to invest in the medium term (between 24 to 72 months) and earn income on a quarterly or bi-annual basis.

  • Property

Investing in property is another option to consider – whether building “li-duplex”, “malaene” for rental purposes or investing in commercial property. This asset class is suitable for an investor with a longer time horizon (between 10 to 20 years) and who are patient enough to wait for the returns. If the tradition brick and mortar are for you, an alternative to consider Real Estate Investments Trusts (REIT) or Property Index funds, which allow you to invest in property via investment funds.

  • Equities or Shares

The last popular asset class to consider is shares of listed companies on the Maseru Securities Market (MSM), Johannesburg Stock Exchange (JSE) etc. As an alternative, investors can opt to invest in Private Equity (not listed on stock exchanges). When considering equities as an asset class, it is key to also remember that equities are extremely volatile, especially in the short-term. Doing thorough research therefore is extremely important. Investors should also diversify their portfolios and avoid putting all their eggs in one basket e.g., cash or bonds.

Successful investing can be overwhelming but Mosotho ore “Matsete a hloka nako le mamello. Lepotlapotla le ja poli; lesisitheho le ja khomo.” Let’s remember that it takes time, starting early and determination. Let’s build Leruo Basotho!

Disclaimer: The views and opinions expressed in the article are of the author. If you are looking for financial advice, please speak to a qualified Financial Planner.