Cash, bonds, property, stocks: ranked by risk

0:00Sophie Hallwright: Do you seek adventure and want to serve your country? The Central Intelligence Agency's Directorate of Operations is hiring. As a member of our team, you'll work on high-impact operations around the world, safeguarding our nation and making a difference. We're looking for individuals with a can-do attitude and a collaborative mindset. If you are looking for a challenging and rewarding role, explore available opportunities and apply online at cia.gov slash careers. Hi, I'm Sophie. I'm one of the founders of The Curve. And I went from being in 50k of debt, not understanding investing, knowing how to budget, save.

0:39Sophie Hallwright: I was a total financial disaster. Now I have two investment properties, over 100k in the stock market, and I'm in no debt. But I did not always used to be this group of money and investing. And it all started from the very beginning of this podcast. We're currently on a podcast break. So we're having two weeks off new episodes and we wanted to do some throwbacks to the vintage OG episodes that were released originally five years ago when I knew nothing about investing. If you don't need to go back to these throwback episodes, enjoy two weeks without us in your ears. But if you know anyone who's felt left out of the conversation when it comes to money, investing, or just really don't know where to start, please send them this podcast.

1:22Sophie Hallwright: We will be back for regular programming at the start of October. Okay, this is the third episode that we ever released for the Curve podcast. It was all about the different asset classes. It's really, it's so funny to reflect on this because I remember when Vic would talk about asset classes and she would say, you know, there's different types of assets and all of these words were so foreign to me when we first started the podcast. And I remember thinking, can you please just use different language? And so these early episodes, I definitely ask a lot of questions. So if you're new here or you're new to investing, hopefully it'll be really helpful to hear me ask a million questions just so that it feels super easy and these concepts land.

2:11Sophie Hallwright: But in this episode, we're talking about the four main asset classes. So that is cash. So just having money in the bank or in your wallet. Bonds, which is essentially like an IOU, we will explain that in this episode, property, which is obviously an amazing asset class because you can borrow money and kind of amplify returns via leverage. It can also be quite dangerous if you are amplifying losses should the property market go backwards. Then you have stocks, which is obviously the main focus of this beginner series. So stocks being buying a little piece of companies that are public. So the idea of this episode is to explain the different types or the different places that you can put money where you can get a return.

2:57Sophie Hallwright: A lot of us grew up thinking money in the bank is safe and clever and I can see it and I can use it if I need it. The problem with that is that the money is not really growing and if you're an environment where inflation is running quite high, which in the past five years you've probably heard inflation thrown around a lot, it means that you're kind of going backwards. So if your money is not creating a return that keeps up at least at the rate of inflation. So say inflation is at 3%. That means that say you have$5 and you can buy a coffee with it. I actually don't even think you can buy a coffee for$5 anymore.

3:34Sophie Hallwright: In the UK, it's like£450. So anyway, the point is what you can buy with that amount of money will change because the next year it will be 3 % more expensive because of inflation. So your money just doesn't go as far. You don't have the same like purchasing power. And so the idea with keeping your money in the bank when inflation is high just means that you're kind of losing money. The concept is just inflation is like eating away at the value of your money. And so deciding where you put your money or where you invest in the different asset classes means a different return because some of those are safer options than others.

4:13Sophie Hallwright: And that's really what we dive into in this episode. So this will be a great episode just to lay the foundations of what are the different places that you can put your money where you can generate different types of returns. So again if you are new here welcome. I hope that these episodes are really helpful and give you the confidence to know that investing is so easy. Anyone can learn this stuff you just haven't been taught. So enjoy this episode. If you aren't new here and you already understand these basics, please send them to someone that is new to investing, that needs to learn, has perhaps put it off because they feel intimidated by these conversations.

4:49Sophie Hallwright: Okay, enough chat from me. Let's get into the episode.

4:58Sophie Hallwright: So today we're going to talk about the different asset classes. I love that I'm introducing it like I'm going to be telling everyone. I've got a vague idea. I know that there's four.

5:11Victoria Harris: Yeah.

5:11Sophie Hallwright: And I feel like I know one is cash and one's stocks, but I don't.

5:16Victoria Harris: Do you want to, you can leave this episode.

5:17Sophie Hallwright: So today we're going to be talking about, no. But yeah, if we can kind of start from the beginning and have that broken down, that would be awesome.

5:24Victoria Harris: There's kind of four main asset classes. We've kind of touched on a few. So there's stocks, which is like shares, equities, it's all the same thing. And that's basically owning a part of a company, right? Yes. Yeah. So we'll get into that in a bit. There's stocks, bonds, cash, and property. Those would be kind of the four different ones. And when we talk about different asset classes, they're different because they move in different ways. They have different drivers. They have different return and risk profiles. So you lump them into four different buckets.

5:55Sophie Hallwright: And so does that mean that some of them are less volatile and some are more volatile? Yes. Yeah. So what can we go in order then of the least volatile to the most?

6:04Victoria Harris: Yes. Okay, so the least is cash, and it's probably the easiest because everyone kind of knows what cash is. Cold, hard cash, the lowest risk, also the lowest return. When we talk about cash, we kind of talk about term deposits as well, because effectively, that's just cash in the bank. So investing in cash is good for people with a very low risk appetite. So like Granny, like we mentioned before. Yeah, and it's considered the safest investment, really. The risk is low, but the return's low, and that's why you're only getting 1 % return.

6:31Sophie Hallwright: What's another example of a cash investment then? There's obviously term deposit. What else is that? Or is it just term deposit? No, there's term deposit.

6:38Victoria Harris: It's like anything, like cash investment can be cash under your bed, under your mattress. You know, investing, you're just putting$100 of your salary away every month under your mattress. That's investing in cash. Holding cold, hard cash. But I guess with the lack of cash used now, it's cash in the bank, cash in your savings account, your checking account. So it's essentially holding on to what you have without really growing it at all. Yeah.

7:05Sophie Hallwright: It's the simplest holding on to something.

7:08Victoria Harris: Yeah. Okay. And something that you can access instantly. True. Yeah. I mean, a term deposit, you're sometimes, actually, you are usually locked in for a period of three months, six months, 12 months. But with a checking account, for example, I mean, I wouldn't even say that's investing because it's not.

7:25Sophie Hallwright: You're like 50 cents a month or something. Yeah. It's not investing.

7:28Victoria Harris: You're just putting your money there and you're not making it work.

7:30Sophie Hallwright: Well, I guess if we're talking about like an asset, though, like, you know, if you own a stock or you own a house or whatever, you still own that money. It's just not growing in terms of any kind of return, right?

7:41Victoria Harris: Exactly. And you have earned that cash and you own that cash. And when you see a thousand dollars in your bank account, that is the value of your asset. OK.

7:50Sophie Hallwright: This is making sense. So cash is the least volatile and also the least return.

7:55Victoria Harris: Yes. Yeah.

7:56Sophie Hallwright: So what would be the second?

7:57Victoria Harris: The second one would probably be bonds. And when I say a bond's a bit tricky to understand, when I talk about a bond, these can also be called, the same asset class can be called fixed income or fixed interest. And a bond is you're effectively loaning money to a company to use, to grow or to use it however they please. Give me an example of that. So usually it is, you know, massive corporations. They're pretty safe. Would this be like Apple, for example? Yeah, Apple, like US government, the New Zealand government, Auckland Council, you know, maybe some of our utility companies in New Zealand.

8:37Sophie Hallwright: So very reputable companies.

8:39Victoria Harris: Reputable companies that have been around for a long time, what we kind of call blue chip companies, corporations. they would issue a bond and with that let's say it's a million dollar bond they need a million dollars from investors really so you would say look I'll give you a portion of that and in return because I'm lending you that money I want to be compensated for that risk that I'm taking so therefore they will pay me a fixed amount which is why we come back to it being called fixed income, which may be 2%, 3%, 4%. It's usually pretty low, particularly in today's world. Not much higher than the likes of a term deposit.

9:21Victoria Harris: And it's for a fixed period of time. So you know, if I'm lending this company$1 ,000 and I'm going to get a 2 % return, I'm going to get that 2 % return either paid monthly or annually. And then at the end of that loan period, or the end of that period for that bond, what we call a maturity date, you get that$1 ,000 back. So the return that you've made on that$1 ,000 is the fixed income amount of 2%, 3%, 4 % or whatever.

9:51Sophie Hallwright: And why is that? Because it sounds quite similar to what I thought a stock was. Is there no risk that that company could not give you your money back? There is a risk.

9:59Victoria Harris: I guess it's because this is kind of going into a bit of a deeper topic, but it's because it's lower risk for the likes of me and you because if a business is going to go under, it's going to pay its debt holders, which is its bond holders, the likes of you and me, first before it pays its equity holders. Okay. So you get priority if the business is going to fail. You get paid first before the equity or the stockholders. So it's kind of, yeah, it's just a different way for a company to get money to fuel growth or whatever. There's just lots of different ways out there, one of them being on the stock market and having investors buy shares.

10:39Victoria Harris: Another one is through a bond.

10:41Sophie Hallwright: And so obviously with a share, the reason that it's more volatile and therefore the return could be greater is because it's not fixed. It could go up, it could go down.

10:49Victoria Harris: And usually they're not investing in high risk things. So for example, with the Auckland Council, like if you're lending them money, they're not making huge risky investments with that money. And so therefore, the bond that you're buying or the fixed income investment that you're making is low risk. Okay. All right, cool. So cash, bond, is stock next or is property? I would say property would be next. With us living in New Zealand, property is pretty well understood in terms of investment. It's talked about all the time. We have this weird fascination with everyone having to own their own home.

11:24Victoria Harris: Right.

11:25Sophie Hallwright: It's like, oh, I'm engaged now. It's time to buy my house. It's so right of passage.

11:28Victoria Harris: Why don't they own a property? Why don't they own a house? Like it's a much more conversational topic. So I feel like people kind of understand it more, but it's still good to kind of put it in perspective of cash, bonds, stock, property. It's definitely more risky than a bond in cash. Oh, interesting. Yeah. So we're going from the bottom up. I totally would have thought that property was pretty safe because things are... It's hard because I feel like we've got this warped perception that property is safe because of New Zealand. and we've been and had a fantastic property market that has only gone down like twice in the last 50 years.

12:00Victoria Harris: So we, and that's why it's talked about so much because everyone has such a good story to tell of their property portfolios. You know, there's kind of, it's talked about a lot and everyone gets this warped perception that property isn't a risky investment. But I'll run through some of the benefits and some of the downfalls. Running through the benefits is that you get a capital gain, which effectively is just a change in the price from when you buy it to when you sell it. So you buy it for a million, you sell it for 1.2. Totally. And that's where we've got this understanding that property is always going to go up, particularly in my lifetime.

12:29Victoria Harris: It kind of has.

12:31Sophie Hallwright: It feels less risky because so many people want to buy houses and it's constantly kind of pretty stable.

12:35Victoria Harris: And we live in a country where everyone wants to come live here. You know, we've got through COVID, touch wood. We've got a politically safe environment and country where people want to raise their kids. We've got net migration. People want to live here. So there's all these drivers that are driving demand for property, which are driving up house prices, that capital gain, that change in prices has historically, on average, always been positive. But that can be a capital loss. And that's when your value of your property goes down. The benefits is that the return consists of two things. It consists of your capital gain, but also your rental income.

13:11Victoria Harris: So if you get tenants in there and they pay you rental income, that's also a return on your investment. So you've got that kind of double whammy.

13:20Sophie Hallwright: Yeah, of course, because if you're getting people that are paying more than what you would pay for your mortgage, then you're getting money on top of that as well. Totally.

13:27Victoria Harris: And that should be calculated in your return when you're kind of considering buying property. Another benefit is leverage. So leverage is effectively just debt or a mortgage. Bear with me. I'll just give an example. So say, for argument's sake, you could buy a house for$1 ,000. You had that full$1 ,000. I wish that was the case. Awkward house prices. A million dollars. You could buy a tent for$1 ,000. Oh, no. So say you wanted to buy a house for$1 ,000. You had$1 ,000 that you could just pay for it outright. You didn't have to get leverage or a mortgage or debt, whatever you want to call it. Fast forward 12 months.

14:01Victoria Harris: That house is worth$1 ,200. It's gone up 20%. You've made 20%. What's that, Vic? Which is$200. Okay, got you. Now let's do a scenario where you've used leverage. You want to buy the same house for$1 ,000, but you only have$200 of savings. So you need to go to the bank and borrow that$800. So you're leveraging that purchase. You're getting debt to fund that purchase. You're borrowing$800. Fast forward 12 months, that house has gone up 20%, same as the previous scenario. So that house is now worth$1 ,200. but the bank still just wants its$800 back. It doesn't really care about the return that you've made.

14:43Victoria Harris: It's a fixed amount. It's a fixed loan amount. We won't get into details of mortgage repayments and all that. But for argument's sake, your$200, you've actually made 50%. Your$200 has now gone to$400. Why? Because the difference, if you go$1 ,200 minus$800, is$400. Because it's almost over-indexed, the amount that you have generated in terms of return, because the bank doesn't want any of that 20 % of the total house price. You've effectively been able to pocket all that gain. You've been able to pocket that whole 200 gain by only putting down 200. Whereas in the previous example, you put down 1 ,000, you still pocketed that whole gain of 200, but it was on$1 ,000.

15:27Victoria Harris: So the percentage-wise, it's a lot smaller. One of the benefits is the leverage, is that just means that it exacerbates your return that you can get. It makes your return you can get a lot greater. But also, one of the pitfalls or the downfalls is that that can work in reverse. If the market falls, you cop the whole loss. The bank that gave you the leverage or that gave you the mortgage, they still want their money back. So it works on the upside and also on the downside. Just one more thing. The benefit of property is that people just love being able to see what they own and the tangibility of that asset and being able to live in their house and touch the walls.

16:04Victoria Harris: Exactly. Sit on the ground, sit on the chairs and table. Whereas when you buy a stock or a bond or even cash in the bank, it's not actually a tangible thing and it's just a number on a screen or whatever. And it's kind of this... It's quite elusive really, isn't it? Yeah, it's very elusive. So yeah, people just like having that tangibility. The flip side and one of the downfalls also of property is liquidity. So that just means being able to get in and out. Yeah, with a stock, you can sell it instantly. It's priced daily. Whereas if you needed the money from your property and you needed to sell it really quickly, on average, it takes like 90 days, three months to get that money.

16:42Victoria Harris: And that's if the sale goes well, right? Totally. So just having your money tied up in property can be also quite risky. But in terms of the risk return spectrum that we're kind of talking about with these asset classes. You've got cash on the left, then you've got bonds, then you've got property, and then you've got shares on the right-hand side. I mean, we could talk for hours on this part. The most risky, but the highest return out of these four different asset classes would be stocks. And when I say stocks, I mean shares, stocks, equities, whatever you want to call it. People talk about all these different terms, but they just mean the same thing.

17:16Victoria Harris: So a stock, a share, an equity. Owning a tiny part of a company, right? It's all the same thing. It's a different name. And it effectively means you're a tiny shareholder in a company. So you share in the growth of those profits. You're part owner of a company, which may seem weird. You're like, I'm buying shares in Apple, but does that make me, do I own Apple? Well, you do. Like you are part, you and a billion other people, but you own a part share of Apple. And so you want to make sure that when you're investing in shares, you're investing in a company that's going to grow. Something you believe in, whether it's...

17:53Victoria Harris: Totally, yeah. Something that you can see those profits are going to grow because that's what you're going to be... Sharing in the success of.

18:00Sophie Hallwright: Exactly, yeah. I love the way you explained that, that you're sharing in the profits of something. It kind of makes sense why you own it and therefore you're sharing in the money that they also make.

18:09Victoria Harris: Yeah, and something maybe a bit closer to home. It's like if you invested in your friend's fashion label, you were investing in them because you could see the success it's going to have. You believe in that success and the profits that are going to come from that. And you want to be a part of that story. And that's effectively what everyone's doing every day in the stock market. They're investing in companies they believe will grow and that they can share in those profits. You can also start investing with nothing. Like you don't need. You could do$5 towards something. Totally. Whereas investing in property, you need like$200 ,000.

18:41Victoria Harris: Which is crazy. That's like pretty unobtainable for a lot of people. So the fact that you can invest, you can be a shareholder for as little as$5,$10,$50 is pretty cool.

18:53Sophie Hallwright: But then I guess you're right in terms of the vitality that you can also lose all of that immediately. So that's why it's the riskiest, right?

18:59Victoria Harris: That's why it's the riskiest is because coming back to that liquidity argument with shares that they're priced daily, that they move up and down, sometimes a lot. Like if we looked at what happened at COVID when the market fell 30%, that's a huge loss for a lot of people. And that's the risk you're kind of taking when you're investing in stocks is that you can lose kind of 100%. Obviously, different companies have different levels of risk. Like we came back to the biotech example and the supermarket example. But at the end of the day, yeah, there is a lot of volatility and a lot of risk and a lot of uncertainty when it comes to investing in stocks.

19:35Victoria Harris: But you, on average.

19:37Sophie Hallwright: But we're the surgeon, right? You're the surgeon in that scenario.

19:40Victoria Harris: On average, you're compensated for that return in the long run. And that return comes in the form of similar property. You get the change of the price, which is the growth. So, i.e. you bought a stock for$1 and then by the time you sell it, it's$1.20 or something.

19:54Sophie Hallwright: Exactly, yeah.

19:55Victoria Harris: But with a lot of companies, you can also get a dividend, which is kind of like rental income. I didn't even realize that. Yeah, so they can pay you on top of that price difference. So, yeah, so you can get dividends and you can get the price gain. So income and growth is kind of what we call it. We'll go into more detail with this in another podcast, right? Yeah, exactly. Because my brain's starting to hurt. Yeah, so you've got cash, then bonds, then property, then stocks.

20:22Sophie Hallwright: Okay, so those are asset classes. And the reason that they're in different buckets or sections is because some are less risky and then some are more risky. And they're kind of clumped together, right?

20:31Victoria Harris: And the supply and demand drivers that move each of those asset classes is different. We're going to come into another discussion on diversification, but that's why you should, if you can, invest in different asset classes to spread your risk even further.

20:45Sophie Hallwright: In terms of what we're going to go into next episode, are we basically going to focus quite a lot on diversification?

20:51Victoria Harris: Yeah, so we're going to talk about why investing for the long term is so important and also diversification, kind of one of my favourite topics of finance. You talk about this a lot. Yeah, yeah. It's just so important and it's a natural flow on after talking about the different asset classes.

21:08Sophie Hallwright: I guess when you understand the different asset classes, it makes sense to then think about different places to put your money rather than the one thing that makes sense to you. Exactly.

21:16Victoria Harris: And why we should be investing in the different asset classes. It's kind of about why we shouldn't have all our eggs in one basket.

21:24Sophie Hallwright: If you drop all the eggs, you've got nothing for breakfast. Exactly. You'll go hungry.

21:28Victoria Harris: Thank you so much for listening to Raising the Curb. These conversations are designed to teach you everything you need to know to be better with your money, from saving to investing to talking with your friends about your salaries, all of that stuff.

21:38Sophie Hallwright: And if you like what you heard, we would love if you could please hit subscribe wherever you're listening and leave a comment, let us know what you thought about the episode.

21:45Victoria Harris: And it only takes one second and it would really make our week, our month, our year.

21:50Sophie Hallwright: Yeah. Yeah. So please do it. Okay.

21:52Victoria Harris: Love you. Bye.

21:56Sophie Hallwright: Okay, quickly, the Curve was created to empower and educate you about investing, but we are not financial advisors.

22:02Victoria Harris: Our platform exists for educational purposes only and it doesn't provide personalized investing advice for your individual needs and should not be relied upon to make an investment or financial decision.

22:11Sophie Hallwright: And always remember to do your own research before making any investment or financial decision. We're here for any knowledge and support you need but the final call is always yours. And thanks for being here. You got this. Yeah, we know you got this. Make every game count this year, Chicago. Blackhawks membership plans are on sale now. Get closer to the action and be there for the biggest moments, loudest cheers, and every unforgettable night at the United Center.

22:36Victoria Harris: With flexible plan options, you can create a game schedule that works for you. Hey, Blackhawks fans, Patrick Kane here. I'm so excited to be back in front of the best fans in the world at the United Center this season. Grab your tickets today.

22:49Sophie Hallwright: Visit tickets.blackhawks.com for all the details.