Investing 101 (Part 2)

Last time we were introduced to the six asset classes. So let's have a look at each of them.

1. Cash - Cash is a means of exchange and a store of value. You put your money in the bank for example and they pay you interest at a rate that is just above inflation. In Japan that is very little with interest rates advertised at some places as being 0.1%. Not really the deal of the century.

2. Bonds are when you lend your money to the government or some company. They pay you interest and at the end of the term they return your money. Bonds generally pay interest higher than the bank because naturally if they didn't then any would-be investor would choose the bank as the bank has a reputation of being a little bit more safe and secure.

3. Equities - Equities or stock or shares depending on what part of the world you are in are an example of investing where you become owner or part owner of a corporation. You participate in the profit and loss of that company.

These three asset classes are linked. They are linked by three things, first of all they are linked by inflation which is the rise of the cost of goods and services over time. They are linked by time and they are linked by your base currency. Your base currency is the currency of the likely end use of your money. For example if you are saving for your retirement in Hawaii then your base currency would be American dollars. If you were saving for your children's education in Sydney then the Australian dollar would be your base currency.

Next time we will go through the final three asset classes and we will see how they all work in the financial planning process.