Written by Neville Martens, Refocus.
 
There is a perception that certain investments are affected by changes in the economic climate whilst others are not. Nothing could be further from the truth. Markets either go up or they go down and investments, or asset values, either increase or decrease. You can reduce volatility and risk exposure, but ultimately economic and market conditions will determine the return of your investments or asset values.

There are 3 basic types of asset classes that people invest into and these consist, to varying degrees, of property, equity and cash  (fixed interest included in this asset class) – and they are all dependent on economic cycles and market behaviour.

PROPERTY

Property investments include such assets as your principal place of residence, investment property, farm, commercial building, vacant land, etc. Interest rate fluctuations are dependent on certain economic factors influenced by a supply and demand for credit as well as numerous other factors.

 In most cases interest rate increases have a negative effect on equities as well as property-related investments. The main reason being that as the cost of borrowing money increases, the demand for it decreases and the demand for expensive assets, such as property, decreases resulting in the assets losing their intrinsic value.

Conversely, as interest rates decrease, the equity sector of the market generally picks up value. Demand for money and loans, or credit, increases and as a result property and property-related asset values increase.

EQUITIES or SHARES

Equity investments consist of all those types of investments that are more directly linked to the shares on the stock exchange and are dependent on the performance of the market for returns.
Equity investments include assets such as shares, managed funds, superannuation funds and property trusts.

The aggressiveness or defensiveness of the investment structure depends on the type of equity or share, or the composition of the portfolio or the underlying funds. The investment can include a guarantee, which will smooth returns, but it is still ultimately dependent on market movements as far as the returns are concerned. It is extremely important that investors always take a longer term view if they are going to place money into any form of investment.

Do not panic during periods of under-performance – the cycle will turn. Panic may result in the incorrect decision being taken and a ‘paper loss’ may unnecessarily be converted into a ‘real loss’.
If one considers that last year’s negative market correction was massive, then one must accept the fact that there will be volatility in our markets as they recover, and therefore in your investments, for some months to come. Do not become impatient, but rather extend your investment horizon for another few years to allow for growth to return to your investment, no matter what the asset class.

CASH

The performance of your assets held in cash are also linked to the economic climate in the sense that certain economic factors will affect the various sectors which constitute the market, differently.

These factors then influence interest rates which affect your cash returns positively or negatively, and after one deducts the taxable portion from your interest earned you arrive at the net growth. You then need to apply the inflation rate to the return, and if one does this today whilst interest rates are relatively low in comparison to a few years ago, you then end up with a rather poor real return.

Even cash can be an unattractive asset class when comparing real returns and running the risk of inflation eroding these returns over a period of time. Remember, all your assets are linked to the market and the economy in one way or another, and unfortunately the returns cannot always be positive in the short term. However, over the long term you have an excellent opportunity to realise positive returns in your investment.