In addition to the asset classes of real estate, fixed-income securities (bonds), commodities and liquidity, equities also play an important role as an asset class. An asset class is a group of similar financial assets that share common characteristics in terms of performance and risk. Therefore, asset class values behave similarly when the economic environment changes.
Acks are important because they usually make the largest contribution to the performance of the portfolio as a whole. With shares, the private investor acquires his own shares in a company and is rewarded for this through profit sharing (dividend distributions). In addition, the value of the share itself is based on the daily stock market price.
In a portfolio, stocks can generate a gain of 50% or more in a year, but they can also be responsible for a loss of up to 30% or more. What are the reasons for these strong fluctuations? Share prices do not necessarily correlate with a company’s current sales and earnings. They may also reflect the economic development of the company expected by market participants, both positive and negative.
However, share prices also depend on other influences that often have little to do with the company itself. For example, the general economic situation has an impact on the markets and thus on share prices. The same applies to the political situation in a country, on a continent or even worldwide.
In a portfolio, stocks can generate a gain of 50% or more in a year, but they can also be responsible for a loss of up to 30% or more.
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In the event of poor corporate performance or overall economic development, the share price is likely to fall. If the company becomes insolvent, the share may even become worthless. The money invested would then be lost. Therefore, it makes sense never to invest all your assets in the shares of a single company, but to invest your money in different shares of several companies in order to spread the risk. This diversification can also take the form of investing money in a mutual fund or a low-cost ETF (Exchange Traded Fund), a fund that is traded on the stock exchange.
Here it is important to think carefully about how much diversification is desired and how much return the investor expects compared to a benchmark. It is also important to consider the choice of benchmark. The major stock indices such as the DAX 40, the EuroStoxx 50, the Dow Jones, the Standard & Poor’s 500, the Nasdaq 100 or the MSCI World are all viable options. Which geographical (sub)market should my investment cover? What sectors of the economy should I focus on? Are there specific issues that should be considered (e.g., sustainability and ESG, attention to environmental and social standards). In many cases, a combination of different stock indices is chosen in order to set certain priorities. For example, a technology-oriented European investor might choose a benchmark composed of 30% Eurostoxx 50, 30% MSCI World and 40% Nasdaq 100.
The boundaries between different asset classes can be very blurred. Some securities may be classified as either equities or bonds, depending on their current status. There are numerous hybrid forms of shares and bonds, such as convertible bonds and coco bonds. There are also hybrid forms between real estate and shares, such as REITs (Real Estate Investment Trusts) or real estate shares, exchange-traded investments in real estate.
The bottom line is that the best way to determine the expected return and potential risk of a portfolio is to set an equity allocation and/or equity range. The higher the equity ratio, the higher the expected return; but risk tolerance and risk appetite must also be correspondingly high. These are precisely the points that an experienced asset manager can ask about and analyze in a detailed personal consultation. An old rule of thumb is one hundred minus one’s age = current equity allocation; but, of course, that depends on the goals and needs of the individual investor.
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Conclusion on the topic of shares as an asset class
In summary, Genève Invest, with its 20 years of experience in investor portfolios, can state that equities belong in every portfolio. It remains to find out, based on the individual risk capacity and risk appetite of the investor, in which range the quota of the asset class shares in a portfolio can or should move.