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Module 2 - Part 1/5: Asset classes (Continued)

July 17, 2023
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EasyEquities
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EasyEquities

In this module, we break down the different types of asset classes.

Welcome to the EasyEquities Mentorship program, where we make investing EASY for you!

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

Lets get right into it!

Yesterday, we went through  shares, cash, and bonds as an asset class. Today , we will go through:

ETFs
Real Estate
Cryptocurrency
Commodities

ETFs (Exchange-traded funds)

ETFs are low-risk, low-cost asset classes. 
The main characteristics of an ETF are that they track an index.

In other words, ETFs are like a basket of shares. ETFs track a specific segment of the market.  
For example, the Satrix S&P 500 ETF tracks the 500 largest businesses in the U.S. Purchasing this ETF means that an investor will have access to every stock on the index, and when a stock underperforms, it is simply replaced with another stock. 

ETFs do not only track shares. Some track commodities, REITs, and some even track bonds. ETFs track many asset classes.

ETFs are a fantastic way for investors to diversify and it is often recommended that new investors start by purchasing an ETF. 
ETFs are traded on the stock market exactly like shares.

Figure 1 [refer to the image attached] shows the risk level of ETFs.

Real Estate

Real Estate is broken down into two main types: commercial property and residential property. Investors can invest in physical property on the EasyEquites platform (through EasyProperties) for as little as R5!

Investors can also invest in REITs (real estate investment trusts). REITs are companies that own, finance or operate income-producing real estate.

REITs pool capital together from all their shareholders, which makes it possible for investors to earn dividends from real estate without owning, financing, or managing any real estate. 
This makes REITs affordable, low-risk, and easy to invest in. 

Most REITs lease space and collect income and distribute that income as dividends to investors. In South Africa, REITs are required to pay 90% of their income from investments to shareholders.

The demand for real estate will always be relevant, which translates into capital growth and higher rental yields.

Figure 2 [refer to the image attached] shows the risk level of real estate.

Cryptocurrency

Cryptocurrency is relatively new on the block, it is centred around blockchain technology
Because crypto is still new, they are extremely high risk. Crypto is by far the most volatile asset class. Some cryptocurrencies have ended in investors losing an incredible amount of wealth. Crypto is a cross between currency and digital assets. 

The idea of cryptocurrency is to invest in the underlying blockchain technology for long-term gains, so investors need to understand exactly what the cryptocurrency is trying to achieve.  
What makes crypto stand out is that its blockchain technology takes away the need for 3rd parties such as banks, Visa and PayPal. That is to say, there is no individual trustee. It is decentralized.

Figure 3 [refer to the image attached] shows the risk level of cryptocurrency.

Commodities

Commodities are physical assets that are often used as raw materials to produce goods and services. Commodities are hugely important, as they are the building blocks of the global economy.

During times of inflation, commodities tend to do well as the demand seems to increase. Commodity exposure can help diversify a portfolio and perhaps lower the overall risk. 

Figure 4 [refer to the image attached] shows the risk level of commodities.

Risk-Return relationship

Risk and return are inherently tied together. The more risk an investment has, the more potential return it has and the more potential loss it has!

The opposite is true for low-risk investments. The less risk an investment has, the less potential return it has and the less potential loss it has. 

Figure 5 [refer to the image attached] illustrates the risk-return relationship for the different asset classes.
 


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