The ASX and the stock market in general is known as a place for buying and selling shares (as it should be). But many investors would be unaware that stocks (or equities as they’re sometimes called) are only one of many types of asset class that you can use the ASX to invest in.
Whilst I’m not a particularly religious person myself, I am quite fond of a certain Bible passage that reads:
“But divide your investments among many places, for you do not know what risks might lie ahead.”
– Ecclesiastes 11:2
Conventional stocks – shares of company ownership – are one of the most lucrative investment classes you can invest in in this world, but they are also amongst the riskiest of assets. It’s very difficult to predict how much your shares might be worth in a year or even 10, because the markets are subject to wild (and often violent) fluctuations from time to time.
That’s where other asset classes come in. Some assets, like property, are somewhat correlated with the performance of stocks; i.e. when the share market crashes, property prices are likely to follow to some degree. But other assets are not correlated to stocks, or even negatively correlated (meaning they often rise in value when stocks fall).
That’s why Harry Markowitz, who pioneered modern portfolio theory (one of the most accepted theories of money and wealth), calls diversifying across different asset classes the ‘only free lunch in investing’. This ‘free lunch’ refers to using a basket of different, uncorrelated investments to smooth returns whilst maintaining a substantial rate of return for your portfolio overall.
So to that end, here are a range of differing asset classes you can invest in on the ASX to build a truly balanced and diversified portfolio.
Whatever the name you choose to use, shares represent a partial ownership of a publicly traded company. By owning shares, you are owning a piece of a business, which entitles you to a share of that business’s profits. Shares are highly volatile (as mentioned above), partly because companies’ profits are highly dependent on the overall growth of an economy as a whole, and partly because the share market is a place where emotions can rule over cool heads.
With shares, you have a choice between buying individual stocks like BHP Group Ltd (ASX: BHP) or ‘managed investments’. These can include listed investment companies like Argo Investments Limited (ASX: ARG) or listed trusts like Magellan Global Trust (ASX: MGG), who do the stock picking for their investors.
You can also use ETFs (exchange traded funds) like Vanguard Australian Shares Index ETF (ASX: VAS) if you want to buy a basket of every major company on the market. Or if you wish to venture beyond our shores, the iShares Global 100 ETF (ASX: IOO) might be a good supplement.
This one is more of a ‘subset’ asset class to shares in general. But since established dividend payers can act in a slightly different way during market cycles, many investors use them as a ‘hedge’ to other perhaps more growth-orientated stocks. Strong dividend payers can keep their dividend flowing even in tough times, which can help smooth out a portfolio’s returns.
You can pick strong dividend companies yourself, or invest in dividend-focused LICs or ETFs like the iShares S&P/ASX Dividend Opportunities ETF (ASX: IHD), which invests in a basket of high-yielding stocks.
When Aussies typically talk about ‘property, it’s usually in the context of residential housing. But the property sector encompasses so much more than this, with industrial and commercial buildings proving lucrative over the past decade as well.
The ASX hosts companies known as REITs (or real estate investment trusts). These are companies that invest primarily in land and buildings, and pass on the rental returns to their shareholders.
In this way, you can invest in property on the ASX. With a higher focus on income, property does have a similar asset profile to dividend shares, but property assets are typically affected less by economic conditions and more with other factors such as interest rates.
If you don’t want to buy individual shares of these businesses, there are also ETFs like the Vanguard Australian Property Securities Index ETF (ASX: VAP), which invest in a basket of REITs.
Bonds are essentially loans that come with a set annual interest payment (sometimes called a coupon). These investments are sometimes called ‘fixed-interest’ for this reason. Bonds have traditionally been used as a ‘hedge’ to stocks, as bond prices are typically negatively correlated with shares.
This is because bonds are viewed as ‘safe’ investments – for a bond not to be paid, the issuer essentially has to go bankrupt. If it’s a government bond, there is almost no risk of this (in advanced economies anyway), as a government can usually print more money if it needs to.
Bonds are tricky to buy for retail investors on an individual basis, but (once again) there are ETFs that make the process easier. Some popular ones include the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) and the iShares Core Composite Bond ETF (ASX: IAF).
It’s worth noting that since interest rates around the world are at historical lows, the ability of bonds to provide downside protection and real rates of return is lower than what it has been historically.
Yes, commodities are often classed as an asset in their own right. This is because materials like coal, wheat, soy beans and iron ore are essential to economic growth and development, and so often outperform other assets (like shares and bonds) in periods of high inflation.
If you want pure exposure to commodities, you can invest in farming or mining companies like Graincorp Ltd (ASX: GNC), BHP Group Ltd (ASX: BHP), South32 Ltd (ASX: S32) or Rio Tinto Limited (ASX: RIO).
Gold and precious metals
Last but certainly not least we have precious metals. Precious metals typically include gold, silver platinum and sometimes palladium, but in the interests of time we’ll just focus on gold today.
Gold is a commodity in a raw sense, but the yellow metal has a special correlation to other assets that other commodities don’t possess. That’s because gold (by its nature) has always been viewed as a ‘safe haven’ store of wealth and a hedge against both inflation and economic or geographic uncertainties. Thus, gold is often negatively correlated to the performance of stocks, property and other popular assets and outperforms when there is fear in other markets.
Although investing in physical bullion is one way to buy gold, there are also ETFs like the ETFS Physical Gold ETF (ASX: GOLD) which you can use. GOLD (the ETF) holds its precious metal in a London bank vault and issues units tied to the value of said gold.
So as you can see, the ASX offers much more than just shares of your favourite blue-chips. Using all of these asset classes, you can relatively easily build a balanced portfolio – one that could potentially offer far less volatile returns than your typical all-stock basket of investments.
But make sure to do plenty of research and if necessary consult your financial advisor. There’s a lot to consider with all of these assets and you have to make sure the balance is right for your own risk profile.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.