Assets are the basic building blocks of investing. All financial planning should be in terms of assets. not products.
Assets and products
Assets are things you might invest in. That's why they are called 'assets'.
Cash is an asset. If you put it under the mattress, that's all it is. If you spend it on something that might:
- yield an income, or
- go up in value, or
.......then you have a different asset. The left links sidebar shows the different types of asset.
The trouble with assets is that they can be inflexible (houses), indivisible (office property), illiquid (shares without a market quotation) and hard to diversify (all of them). The financial services industry packages assets into handy bundles for the convenience of the consumer. For example, a unit trust is a package of lots of different shares ('equities') in different companies, subdivided into 'units' that the consumer can buy. The consumer pays for this convenience through management charges and other ways. He needs to judge whether the convenience justifies the charges.
We discriminate, ruthlessly, between assets and products because otherwise investment planning is confused. The planning process is:
- Decide on the balance of assets ('Asset allocation')
- Decide in what form the assets are to be purchased: directly (low cost but inconvenient) or indirectly through products (high cost but convenient)
- Decide on the individual assets (or products) within the asset/product classes chosen
It is vital that the order of the first two is not reversed.
Wrappers are not assets or products - though they are often (incorrectly) sold as such; they are administrative groupings that contain investments (or wrap round investments - hence 'wrappers'). E.g. an Individual Savings Account (ISA) is a wrapper. More in Wrappers.
For another dissection of assets, products and wrappers visit the government's Money Advice Service, though it perpetuates the (we think unhelpful) separation between what it calls 'savings' and what it calls 'investments'.