The best approach to investment planning is, as the old adage says, not to have all your eggs in one basket, to chase after the highest rate of return at  the lowest rate of risk, to understand how the stuff actually works, to buy well at the right time and to hold good properties and equities through thick and thin. Knowing what to reasonably expect from different assets and the type of factors that affect them is the foundation of good long-term strategies.

Not knowing is a fast route to frustration and anger, as each in turn will inevitably let you down at some stage. A lack of understanding of howassets behave when under certain stresses, like interest rate rises or negative sentiment, can also lead to poor decision-making.

First off, there are four major asset classes: cash deposits, bonds, property and equities (shares), each of which is treated separately in Loot! But there also are others creeping into mixes to enhance diversification of investment portfolios, including commodities like oil, steel and base metals and especially gold, which rises in value during times of uncertainty and rocketing oil prices. There has also been marked growth in hedge funds which concentrate on different sectors, using borrowings and derivatives to drive up returns and attempt to protect against large losses. The behaviour of the asset classes is affected by various forces, including the way in which Central Banks implement interest rate policy. What they have in common is that they can each experience violent swings up and down, particularly equities (shares) and commodities, but also property - a fact that's frequently overlooked.

Black Monday, mid-October 1987, is etched into the memories of a generation of flip-flop investors who waited until the very end of bull market in shares, which had lasted most of the 1980's, before committing their cash. During this time property was a dog and equities were all the rage. These late arrivals awoke on Black Monday to startling front-page headlines of huge single-day stock market falls. Within hours the ground-floor lobbies of most Irish Life Offices were crammed with investors yelling for their cash and baying at overwhelmed reception staff. In practice, the stock market hadn't actually collapsed and results for the calendar year 1987 were, in fact, positive. Eventually, after a recovery, the next generation of flip-flop investors tip-toed back, just in time for the Gulf War five years later, when the market fell heavily again. Yep, sometimes you just can't win in markets - and you surecan't if you don't bother to understand them and view risky assets, like property and equities, as short-term investments: they are not.

For example, when the inevitable shake-out in over-valued property markets arrives, short-term speculators hoping to make a quick buck on asset growth will take a real hiding. Long-term investors who bought into a solid rental stream will tough it out and be better off for it.

The Investment Pyramid
A reasonable framework to help fathom where assets stand in relation to one other is to compartmentalise them into an Investment Pyramid that ranges them from "safe" to "investment high risk"


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