What is an asset class?
An asset class groups together a group of financial products that are very similar in terms of their risk-return profile and other characteristics. Equities and bonds are fundamentally different: Bonds (with a high credit rating) allow more predictability than a share due to the defined payment flows. Both asset classes have default risks - however, bonds are considered lower-risk due to the priority servicing of lenders (creditors). The situation is similar with real estate, commodities, digital assets and tangible assets.
Each asset class carries a certain expected return and risk. Which assets investors choose depends on their individual risk preferences. The minimum investment amount can also differ. Shares, bonds or cryptocurrencies are investable from one euro in some cases. The situation is different for physical real estate, for example: Here, investors have to raise much higher sums in order to be able to participate in the value increases. In addition, the asset classes also differ in the liquidity of the markets. Shares in popular companies can be bought within a few seconds in the best-case scenario. In the case of real estate, the purchase process takes at least a week (incl. notary appointment).
In the following article we will give you an overview of the entire investment universe.
Shares
Shares certify the (piecemeal) ownership of a company. Investors can buy shares on the stock exchange via their broker. Compared to bonds, shareholders participate in the performance of the company - in both directions. If the company does well, profits are made. Nevertheless, high losses are also possible, as the Wirecard case in 2020 showed, for example.
As a shareholder, you have two options for making profits: The company can decide to pay dividends. These are shares of the annual profit that are distributed to shareholders. However, there is no obligation to pay dividends, they are voluntary. On the other hand, you can profit from share price increases if the company performs well, enters new markets and improves profit margins.
The financial risk is higher with shares because your return depends directly on the company's performance - it can fluctuate from year to year and cannot be predicted ex-ante.
Private equity
Private equity and shares are similar in that investors in private equity also invest in companies from an owner-like situation. Compared to a classic equity investment, private equity transactions take place over the counter. Small investors in particular have so far been virtually excluded from participating in the market, as the entry sums are in the high six-figure range. Institutional investors, such as insurance companies or family offices, belong to the group of investors.
In private equity, the investors - indirectly via the private equity company - exert influence on the company's development. In the case of shares, the influence is limited to the right of co-determination at the general meeting. In private equity, the influence is usually also of a strategic nature. Private equity managers work closely with the management to optimise the company in order to increase the market value for the investors. In this context, however, high losses can also occur. Private equity companies generally assume losses - many investments fail and have to be liquidated prematurely. Private equity investors must be aware of the risk of total loss. If investments develop differently than envisaged in the due diligence, this usually means high losses in the overall performance of the fund.
There are studies that show that private equity has performed better than the stock market, especially in times of crisis. The long holding periods discipline investors and prevent a quick back-and-forth should the markets become uncomfortable.
Government and corporate bonds
Bonds have long been a popular asset class in Germany. With a bond, investors have the right to repayment of the nominal amount of the bond, as well as a fixed or variable interest rate during the term of the bond. The variable interest rate is usually linked to a key interest rate (e.g. the Euribor) and changes regularly.
The yield (or interest rate) of a bond depends strongly on the creditworthiness of the issuer. For Greek government bonds, you get a much higher yield today than for a German bond. However, with a higher yield comes a higher risk. The risk of insolvency is very present in Greek bonds. You should always be aware of this - yield is never free.
In addition to government bonds, companies can also issue a corporate bond for financing purposes. In principle, this works similarly to a government bond. Both types can be bought and sold on the stock exchange, just like shares.
Real estate
Real estate is one of the most popular asset classes among Germans. Here, investors have various ways to invest. The most common form of investment is physical real estate, which is used as a home of one's own or as a rental property. The return is achieved either through increases in value or/and through the ongoing rental income. The real estate market is volatile and has become the focus of politics in recent years. The Mietpreisbremse (rent brake) was one of the most stringent measures against rent developments. This is a risk factor for investors. In addition, interest rates play a decisive role: if they rise, the financing costs of real estate also rise, which would lead to decreasing demand. There are also substantial risks if a property subsequently turns out to be dilapidated or if the demand for housing declines due to demographic change. Real estate is not a "safe" bet as the media like to claim.
In addition to physical real estate, you can also profit from increases in the value of the real estate market via so-called crowdfunding and investing platforms. The models are often based on a bond issued by a special purpose vehicle that holds the real estate. Investors receive a variable interest rate that depends on rental income and increases in value. Even in this case, profits are not certain; the risk of a total loss exists at all times.
You can also invest in real estate indirectly through participation in real estate companies and funds (REITS). These securities are listed on the stock exchange and are therefore subject to much higher fluctuations than classic real estate.
Commodities & Gold
Commodities (e.g. oil) and gold are other asset classes in which investors can invest either physically or via exchange-traded commodity (ETC). ETCs are securities that allow investors to participate in value increases (and losses) in the commodities market.
Gold has long been called the currency of last resort by financial experts. The precious metal gained great popularity in the past, especially in times of crisis. The following chart illustrates this trend: When confidence in the global financial system was broken at the end of 2008/09, the price of gold rose. Due to the limited amount of gold, gold is also considered a solid protection against inflation - but this has not always proven to be the case.
Tangible assets
In addition to the asset classes mentioned above, tangible assets have proven to be extremely resistant - especially in turbulent stock market weather. These include luxury watches, paintings, vintage cars but also sneakers or valuable playing cards (e.g. Pokémon). Due to the emotional attachment to the objects, investors tend to hold these assets - even if other markets fluctuate strongly. The low correlation as well as the limited liquidity are an advantage.
Nevertheless, an investment in tangible assets is associated with high risks. Every investment is like a bet, as there is no intrinsic value due to the lack of value creation. The value results from demand and this in turn depends on factors that investors cannot control. Tastes change, trends change - and this has an impact on the valuation of tangible assets. Here, too, flops are more the rule than the exception.
Conclusion
Asset classes are diverse and vary in terms of their risk-return profile. Depending on the risk-bearing capacity, an asset class may or may not suit an investor type. The exciting thing about alternative asset classes, which include tangible assets and private equity, is that they have so far only been available to a limited group of investors. The reason for this is the high financial barriers to entering the respective markets.
At tokenstreet, we have set ourselves the goal of changing this status quo and democratising the market more so that small investors can also add alternative assets to their portfolios.
