The asset class menu: What are your options and how should you use them?
By Boring Money
17 Jan, 2025
Investing can feel a bit like walking into a restaurant where the menu is in another language. Shares? Bonds? Commodities? It might as well be French, Italian, or Martian! But don’t worry. We’re here to translate that menu for you and help you pick the dishes (asset classes) that suit your financial taste buds.
What is an asset class?
So, what exactly is an asset class? You can think of it as a group of investments that behave in similar ways. Think stocks and shares, bonds, cash, commodities - that sort of thing.
Each type behaves differently when the market moves, which is why mixing them up - otherwise known as “diversifying” - is a wise investment strategy. It's like spreading your bets rather than putting all your money on red at the casino.
Smart investors use a blend of different asset classes to balance out their risks and returns. Let’s look at some of the main asset classes and some of their main pros and cons.
Main asset classes explained
Shares
When you buy shares (also called stocks or equities), you own a tiny bit of a business. You can make money in two ways with shares. The main way: the share price goes up and you sell for a profit. The other way is if the company you have shares in offers regular payments called “dividends”, a portion of its profits it shares out to shareholders. At the heart of it, investing in shares means if they do well, so do we. And if they flop, we lose money.
Just like the weather, it's impossible to predict what the future holds. Shares are typically a bumpier ride than cash and not a short-term investment. Anyone who says they can guarantee you'll make money, particularly in a short space of time, is probably not telling you the full truth.
I think you need to be able to set your money aside for at least three years to consider shares, ideally at least five. Life is unpredictable – think dot.com crashes, terrorism, wars, inflation – and so the best way to protect ourselves is to have time on our side to ride out any bumps in the road.
Buying a couple of individual shares is a risky way to get exposure to the markets - especially for less experienced investors. You have all of your investment tied into one or two businesses. If it goes badly for them, you're in trouble. This method is good for people who like to take an interest in the market, are time-rich and confident to make decisions themselves. Shares are not so good if you are busy, don’t feel expert in this subject, or will only pick shares in companies you know and love.
Bonds
Bonds are a way for governments or businesses to raise money. They effectively ask us to lend them money, and pay us something in return. If the demand for these bonds is high, the price can also go up. The riskier the bond, the more you expect to be paid in ‘interest’ for making this loan. Which is why ‘corporate bond yields’ (from companies) will typically pay higher interest than government bonds, which are seen as less likely to default.
Unlike shares, which can fluctuate in value rapidly, bonds offer a relatively predictable income stream, making them a good option for more risk-averse investors seeking stability. This is why bonds typically make up a large proportion of pension funds, particularly for those who are closer to retirement age and thus need their pension to be invested in lower-risk products.
Bonds make sense when you want regular income or need to balance out riskier investments. They're particularly useful when you think you’ll need to access your money in 3-7 years.
If you have a pension or you're an investor already, you likely already invest in bonds - they're extremely common components of pensions and are often included in various types of funds, such as multi-asset funds, ETFs and ready-made portfolios.
Before you hunt for new bonds to add to your portfolio, it's a good idea to check what you're already invested in to make sure you're not doubling up or allocating too much to bonds. If you have a pension product, check your annual pension documents for details on what your pot is invested in. For other investment products, most providers allow you to log into your account on desktop or via an app to see a breakdown of your portfolio.
Commodities
Commodities are basic materials used in everyday life - think gold, oil, copper, wheat or coffee beans. Unlike shares or bonds, commodities are physical things you can touch (though most investors never do!).
Most people invest in commodities through investment products like funds or ETPs (Exchange-Traded Products), rather than buying the actual materials. Gold is the exception - some people do buy physical gold bars or coins. But it’s fair to say there aren’t too many people stashing gold bars under their bed these days.
The price of commodities often moves differently to shares and bonds, which can make them useful for spreading risk. They can be especially vulnerable to factors such as supply and demand, climate patterns, and geopolitical events. However, they can also provide protection against inflation, as their prices often rise when the cost of living goes up.
Oil is particularly sensitive to geopolitics, particularly disruption in the Middle East or ongoing conflict with Russia. Some commodities went sky-high in 2024 as climate change made supply really scarce – for example cocoa, as West Africa production slumped. And gold is typically seen as a safe haven when the world is going mad – it is seen as a safe store of value, and provides comfort for some investors at times of instability.
Property
You don't need to be a landlord to invest in property. While buy-to-let is one way in, you can also invest through property funds, REITs (Real Estate Investment Trusts), or property companies listed on the stock market or property funds.
Property can provide both regular income (through rent) and potential growth in value over time. Commercial property - things like offices, shops and warehouses - often behaves differently to residential property, which is why investment funds usually focus on commercial.
Most people already have exposure to property through their own home. So when we talk about property as an investment, we usually mean commercial property or investing in multiple residential properties through a fund or REIT.
Property is obviously impacted by interest rates, planning regulations and the ability to build. A high interest rate environment makes it harder for property to do well.
One key thing to be aware of is that property is not liquid. It’s not easy to sell a shopping centre in one day! So when property is out of favour as an investment (for example during the lockdowns of Covid when we wondered if offices would every be used in the same way again) and lots of people want to sell, they may have to wait longer than they should to get their money out.
How to diversify with different asset classes
Think of building your investment portfolio like making a recipe - you need the right ingredients in the right proportions. But what is the perfect blend of assets for you? It really comes down to when you’ll need your money and how comfortable you are with risk.
Timeframes
A common way of determining your ideal asset allocation is to think about when you’ll need to access your money.
If you need the money within a short time - say, 1-3 years - it’s typically best to stick to cash and maybe some low-risk investments such as short-term bonds. You may want to avoid shares entirely.
For money you'll need in the medium-term, such as the next 4-10 years, you can use a mix of bonds and shares (with more bonds than shares to minimise risk) and use funds or ETFs for easy diversification.
For longer-term money (10+ years), you can focus mostly on shares, with some bonds to smooth out the ride, and consider thematic investment options with ETFs or Investment Trusts which are poised to benefit from long-term growth.
It’s also crucial to remember your portfolio shouldn't stay the same forever. As you get closer to needing your money, you should consider:
Reducing exposure to shares gradually
Increasing bonds and cash
Cutting back on risky areas like small companies or emerging markets
This is called 'de-risking' - many pension funds do this automatically as you near retirement.
The key thing to remember is that you don’t want to be a forced seller. You don’t want to need to sell your shares when the markets are having a horrid time. If you didn’t need your money for say 10 years when Covid hit, you might have felt anxious about the plunge, but you would not have needed to sell. And later that year everything bounced back. So don’t decide your asset allocation just by how nervous it all makes you feel. Decide it with a clear view on your timeframes.
Risk tolerance
Alternatively, you can base your asset allocation around your attitude to risk on the whole.
If you’re a beginner or you’re nervous about investing, you should lean heavily on low-risk assets like bonds, use passive funds and/or ETFs to leave the tricky decisions to the experts, and focus on keeping things simple. Ready-made portfolios can be a great route if this sounds like you.
Middle-ground investors might feel a bit more confident and go for a typical 60/40 split of shares and bonds, using a combination of funds and ETFs, with some Investment Trusts or property – as long as you’re confident you understand what you’re investing in.
Finally, if you're experienced and comfortable with taking on risk, you might focus mostly on shares, perhaps with some individual stocks and more specialist investments or niche themes. If you want to buy commodities, ETPs or a fund are worth a look.
Same as with the timeframe approach, the closer you get to needing your money (e.g. in the run-up to retirement), the more you should consider scaling back your risk exposure and backing more low-risk assets such as cash and bonds.
It’s also worth remembering that you can split your money into different pots. Just because you retire at 65, for example, doesn’t mean you should sell all your shares. You might be around for another 30+ years, so some of our money will have a pretty long timeframe still. Just remember that no-one wants to be a forced seller – so divvy up your money into the short, medium and long-term and consider your asset allocation for each.
The bottom line
Overall, don't try to be too clever – when it comes to investing, simple usually works better. Reflect on your investment goals, when you’ll need your money and how comfortable you are with risk. Then spread your money across different assets accordingly.
Remember: investing isn't about getting rich quick. It's about growing your money steadily over time while managing the risks. Start simple, then add complexity only if you’re ready and fully understand what you’re doing.
If you're ever unsure, seek proper financial advice. It costs money, but investing in the wrong things could cost you a lot more. If you cannot afford it, a simple multi-asset fund will be a relatively straightforward way to proceed, and this will avoid the risk of not diversifying well.
