When it comes to investment planning, deciding how to allocate your assets is one of the most important decisions you’ll make. With so many options available, selecting the right investments and balancing them within a diversified portfolio can feel overwhelming.

In this blog post, we break down key asset classes, their roles in the market, and which ones individual investors should consider including in their portfolios. This approach is backed by leading financial academics and aims to help you create a portfolio suited to your individual needs and objectives.

The Role of Markets

Markets have been central to trade and economic growth for thousands of years. Over time, they have evolved from simple bartering systems to complex electronic trading platforms, increasing transparency and competition.

Today, global investment markets are valued at approximately $680 trillion USD, covering various asset classes, including:

• Equities (Stocks)
• Private Markets
• Real Estate
• Bonds (Fixed Income)
• Alternative Investments such as commodities, art, and cryptocurrencies

Understanding these asset classes helps investors make informed decisions about where to allocate their money.

Public Equity Markets (Stocks)

Public equity markets allow investors to buy and sell shares in companies through stock exchanges. These markets play a crucial role in connecting businesses that need capital with investors seeking returns.

• As of the end of 2024, the global stock market was valued at over $123 trillion USD.
• The U.S. dominates public equity markets, making up 65% of global market value, followed by Europe and Japan (26%) and emerging markets (9%).
• New Zealand’s stock market is relatively small, accounting for just 0.1% of the global total.

Public equities offer investors liquidity, price transparency, and diversification opportunities across various sectors.

Private Markets (Private Equity)

Not all companies are publicly traded. Private companies operate outside stock exchanges, making them harder to access and value. The global private equity market is estimated to be worth $13 trillion USD.

Private equity investments can offer high returns but also come with challenges:

• Limited transparency (less financial disclosure than public companies)
• Illiquidity (harder to buy and sell shares quickly)
• High fees (management fees can be 2% annually + 20% of profits)

For individual investors, private equity is typically accessed through venture capital or private equity funds, but these often have high entry barriers and fees.

Real Estate

Real estate is the largest asset class globally, valued at $380 trillion USD. The breakdown of real estate investments includes:

• 76% Residential property (homes and apartments)
• 11% Agricultural land (farms and rural properties)
• 13% Commercial real estate (offices, retail spaces, warehouses)

While direct ownership of property requires significant capital, investors can gain exposure to real estate through Real Estate Investment Trusts (REITs), which trade like stocks and provide income through rental earnings.

Bond Markets (Fixed Income)

Bonds are loans issued by governments or corporations, offering fixed interest payments. Though they receive less media attention than stocks, the bond market is actually larger, valued at around $140 trillion USD.

• Bonds generally offer lower returns than stocks but provide stability and predictable income.
• Creditworthiness is a key factor—government bonds (like U.S. Treasuries) tend to be lower risk than corporate bonds.
• Bonds can be useful for balancing risk in an investment portfolio.

Alternative Markets

Beyond stocks, bonds, and real estate, investors sometimes explore alternative markets, including:

• Commodities (gold, silver, oil, agricultural products)
• Art & collectibles (paintings, rare cars, antiques)
• Cryptocurrencies (Bitcoin, Ethereum, and others)

The total estimated value of these markets:

• Gold: $17 trillion USD
• Cryptocurrencies: $3.3 trillion USD
• Art & collectibles: $300 billion USD

While alternatives can provide diversification, they often have high volatility and lack intrinsic cash flows, making their valuation more speculative.

What Should Individual Investors Focus On?

Unlike large institutions, individual investors need practical and accessible investments. The recommended core asset classes for a well-balanced portfolio are:

1. Listed Equities (U.S., global, and emerging markets stocks)
2. Listed Property Investments (REITs and publicly traded real estate funds)
3. Fixed Interest Bonds (government and corporate bonds)
4. Cash (for liquidity and short-term needs)

These assets offer liquidity, transparency, and diversification, making them ideal for long-term investment.

What About Other Asset Classes?

Some investments may not be suitable for the average investor:

• Private Equity & Private Real Estate: High costs, illiquidity, and lack of transparency make them difficult to manage.
• Commodities & Cryptocurrencies: Highly speculative and volatile; not recommended as core wealth holdings.
• Hedge Funds & Structured Products: Complex, often high-risk investments requiring expert analysis.

For most investors, sticking to publicly traded stocks, bonds, and real estate is the best approach for building a diversified, low-cost, and accessible portfolio.

Conclusion

To summarize:

• Financial markets connect investors with opportunities across various asset classes.
• Stocks, bonds, and real estate offer the best combination of returns, liquidity, and diversification for individual investors.
• Alternative assets can provide some benefits but carry higher risks and uncertainty.
• A well-structured portfolio should focus on publicly traded assets, balancing risk and return to achieve long-term financial goals.

In the next part of this series, we’ll dive into risk factors and how to build a portfolio that balances potential returns with risk tolerance.

If you want to learn more about financial and retirement planning for international migrants moving to New Zealand, check out our other videos on our YouTube channel Pacific Wealth (NZ) or the other articles on our website.