What I Buy and Why: The Asset Class Decision

Welcome to Financial Fluency - your weekly guide to mastering financial English, learning how money works, and making confident financial choices.

In this issue:

• A Look at the Markets: Bitcoin

• What I Buy and Why: The Asset Class Decision

• Quote of the Day: Financial Fluency Newsletter

• We value your feedback

• Word of the Day: Real Estate

• Interactive Quiz

• Whenever you are ready, here is how I can help you

A Look at the Markets: Bitcoin $BTC.X ( ▼ 0.51% ) 

More of the same from Bitcoin as it trades mainly between $112,000 and $124,000. It did dip below $112,000 for a few days, but has since regained this area of support and resistance.

After this period of consolidation, will the next leg be up or down?

What I Buy and Why: The Asset Class Decision

Building an ETF portfolio from equities to alternative investments

I was incredibly lucky growing up that my parents, one a university lecturer, the other a primary school teacher, were both investors.

Don't get me wrong, they were not big time investors aiming to be the next Warren Buffett. However, they were happy to buy individual stocks if they had any spare money. The benefit for me was that I was surrounded with the idea of investing for your financial future. That was why, when I started work as an engineer at Rolls Royce, I was also happy to put money into the stock market.

However, the turning point for me came in 2015 when I found out about ETFs and discovered how I could have exposure to a much wider range of assets as easily as buying individual stocks - assets that we will discuss below.

Equity ETFs: My Foundation

Coming to investing from buying individual stocks, it was natural for me to start my ETF journey with equity ETFs.

What is an equity ETF?

Think of an equity ETF as a basket containing hundreds or even thousands of individual stocks. They can be bought through your broker just as easily as individual stocks.

But why are equity ETFs so powerful for building wealth?

Which stock will be the next Amazon? We may be able to guess but none of us really know. With an equity ETF you do not have to guess which will be the next Amazon because, as successful companies grow, they naturally represent a larger portion of the index. Equally important, a company could go bankrupt and not affect your portfolio too negatively.

Equity ETFs still form the core part of my portfolio - they provide the growth engine that builds wealth over decades while protecting against the individual stock risks that even experienced investors like my mother faced.

Bond ETFs: Stability (Optional)

Depending on your age and risk tolerance, you may not want all your money in equity ETFs.

Financial advisors usually suggest having a portion of your portfolio in bonds for stability. You can achieve this through bond ETFs, but they're not suitable for everyone.

The key difference: Individual government bonds more or less guarantee your money back at maturity (assuming a safe issuer like the US or UK government). Bond ETFs, however, can lose value and take a long time to recover - just like stock ETFs.

This is why I avoid bond ETFs when interest rates are very low. During the 2010s, bond yields were minimal, but the ETFs could still drop significantly when rates rose. This is exactly what happened in 2022 when many bond ETFs fell 10-20% as interest rates increased rapidly.

For me, if I want true stability, I prefer individual government bonds or simply holding cash. My main bond holdings are in UK bonds but I do hold some bond ETFs for European exposure.

Alternative Assets: Beyond Traditional Investments

As we saw last week, Alternative Assets are investments that are not traditional stocks, bonds, or cash; includes commodities, real estate, private equity, hedge funds, cryptocurrencies, and other non-conventional investments.

We will examine just three of these today to give you examples.

1) Property ETFs (REITs)

Property ETFs typically invest in REITs, which stands for Real Estate Investment Trust.

Many of us may dream of buying property as an investment but this comes with challenges:

1. The first challenge is cost - we may not have enough money or need to get a mortgage (a loan on property)

2. Beyond the initial investment, there's ongoing maintenance - this requires further money and/or work

3. Property requires management - finding tenants etc

4. Many people end up with a property portfolio of one type of property in one location - i.e. little diversification

5. Property is not liquid - i.e. it may not be easy to sell - particularly in a downturn

The solution may be a REIT, which solves some of these problems:

1. You can invest what you can afford without taking out a loan (this may be a disadvantage for those wanting to use leverage though a loan)

2. The fund takes care of the maintenance (although there are management fees)

3. The fund takes care of the management (although there are management fees)

4. REITs may invest in commercial or residential property in different locations

5. REITs traded as ETFs are generally liquid - you can buy and sell during market hours like stocks. However, some REIT funds (not ETFs) may restrict withdrawals during economic downturns.

2) Gold ETFs

If you buy physical gold, you have to store it. This can be risky or expensive. The solution may be to buy a gold ETF which you can buy and sell on the stock exchange. Many people view gold as a hedge against inflation.

3) Cryptocurrencies

Crypto enthusiasts often say that the only true way to hold crypto is holding the asset in a secure offline wallet.

That said, self-custody isn't suitable for every investor. You must manage your keys and how you pass on your assets securely in the event of your death. For those wanting crypto exposure without the complexity, ETFs or ETPs in Europe offer an alternative.

Bitcoin ETFs track the price of Bitcoin without requiring you to manage wallets or keys. There is a fund management cost which isn't there when holding your crypto personally.

My Bitcoin is mostly in cold storage, though I'm exploring European ETPs. An ETP (Exchange Traded Product) is like an ETF but with slightly different regulatory structures - they offer similar convenience for investors wanting crypto exposure through traditional brokers. You can think of them as a European equivalent of US ETFs which can hold cryptocurrencies.

Conclusion

I started the conversation on ETFs last week by declaring that if I could only invest in one type of product it would be ETFs. Hopefully, the discussion today on the different types of ETFs shows their versatility and explains why.

Next week we will look at geography - where you want exposure to through your assets and how I think about geographic diversification.

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: Financial Fluency Newsletter

This captures why I declared last week that if I could only invest in one type of product, it would be ETFs. The versatility we've explored today - from equity foundations to bond stability to alternative asset exposure - shows how ETFs can meet virtually all investment needs for individual investors.

We Value Your Feedback!

Your opinion helps us improve and lets you suggest topics or ask Business English questions for future issues.

Word of the Day: Real Estate

Real Estate - noun - land and buildings considered as property for investment or development; in American English, the standard term for what British English calls "property."

Context and Usage: In international finance, "real estate" (American English) is increasingly used globally, even in British contexts, particularly when discussing investment products like REITs. British English traditionally uses "property" for the same concept. Understanding both terms is essential for international investment discussions.

Note: While "property" remains standard in everyday British English (buying property, property prices), financial products often use American terminology - hence "Real Estate Investment Trust" rather than "Property Investment Trust," even when trading on London exchanges.

Common Collocations:

Real estate investment - putting money into property assets
Real estate investment through REITs offers diversification without direct property management.

Real estate market - the sector dealing in property transactions
The real estate market showed strong performance despite economic uncertainty.

Real estate portfolio - collection of property investments
Building a real estate portfolio traditionally required significant capital and management expertise.

Commercial real estate - office buildings, shops, and business properties
Commercial real estate REITs focus on income-generating business properties rather than residential homes.

Business Example:
The fund manager explained that their real estate allocation provided inflation protection and portfolio diversification.

British vs American Usage: In British English, you might say "property investment" and "property market," while American English uses "real estate investment" and "real estate market." International financial products typically follow American conventions, so investors worldwide encounter "real estate" terminology in investment contexts.

Ineractive Quiz

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.