Traditional investments are most certainly those which appeal to a more ‘traditional’, ‘risk adverse’ investor base. This is in large part due to their liquidity as previously mentioned. Should the asset class start moving in a way that is beyond the investor’s risk tolerance, or they quite simply need cash, the traditional investments are the safer option.
According to the World Economic Forum, there are three main traditional investment types, these being cash, government & corporate bonds and shares.
Cash
Although not as prevalent as it once was, cash has always been considered king! From a very early age in Australia – and around the world for that matter – school children are taught the importance of money, saving and squirrelling money away in bank accounts for everyday savings, emergencies and of course one day the most expensive asset most people will ever own, a house.
In recent times with the rise of international business, eCommerce and cryptocurrencies, the ‘cash landscape’ has certainly changed.
During times of recession or economic hardship, cash and its ability to purchase goods and services is often diminished, with examples during especially the times of the world wars last century, where people walked in with wheelbarrows of cash to buy loaves of bread!
That being said, cash has the ability to buy goods, services, other investment vehicles as well as accumulate interest – albeit meagre – in bank accounts.
Government and corporate bonds
Government and corporate bonds have for centuries been safe forms of traditional investments.
From the government ‘war bonds’ that were used by nations to fund the efforts of the first and second World War, through to bonds to fund future expansions or financial requirements without diluting shareholder equity.
A bond is “an official paper given by the government or a company to show that you have lent them money that they will pay back to you at a particular interest rate”[4]. As the name suggests, government bonds come from the government of a particular nation usually created to fund infrastructure spending or economic development, which generates revenues which can then fund the payback of the bond with interest.
Australian corporate bonds can typically earn you a return of around 5.2% compared to bank deposits or term deposits returning less than 3.2%[5]. While Australian government bonds can be anywhere from 1.5% to 5.7% depending on their particulars, including but not limited to, their investment period and the time in which they were raised i.e.: recession or financial instability.
Shares
In broad terms, a share market, like any market, is a place where buyers and sellers are brought together to buy, sell, trade and invest in financial instruments, while also being a place where companies can facilitate the issuance of shares, initial public offerings and raising capital.
Such financial activities are conducted through institutionalised formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.
In Australia, the exchange is called the Australian Stock Exchange or ASX, there is only one primary market in Australia, however, in markets like the USA, there can be (and are) a number of exchanges set up such as the New York Stock Exchange (NYSE), Nasdaq, BATS and the Chicago Board Operations Exchange (CBOE).
The CBOE was responsible in part for the Cryptocurrency crash when it offered derivative options to bet against the market back in early 2018.
[4] https://dictionary.cambridge.org/dictionary/english/bond
[5] https://www.bondexchange.com.au/