Broad Sectors.
Basically, there are 3 broad investment sectors. These are:

1. Cash
Generally speaking, Cash is, or should be, all about liquidity - i.e. to cover short to medium term capital expenditure so that longer-term investments can be kept in place.

When Cash is treated as "invested capital" rather than liquidity, there is a very serious downside and this is that there is usually no potential for growth of the invested capital. Long term Cash holdings will be constantly devalued by the effect of inflation. It is sobering to note that at a modest annual inflation rate of 5% the buying power of $1000 is reduced to $377 over a 20-year period and, at the end of the day the only relevance to money is what it will buy!

Thus the "cautious investor" who uses this sector exclusively is not "risking" the decline of his capital. He is guaranteeing it.

       
       

2. Middle Ground
These are holdings which aim to produce better medium to long-term results than Cash, but at lower levels of volatility than Equities - thus, they are not no risk but they are low risk and medium/long term returns can be expected to be somewhere between those of Cash and Equities.

3. Equities
This is then sector which has always produced the best results in the medium to long term, thus offering potential capital protection. A study by BZW shows that the average yearly return on shares since 1918 has been 7.8% after allowing for inflation. This compares with 1.4% from Cash - i.e. shares have produced an average return of 5 times more than Cash for over 75 years!

However, nothing is perfect and equities are no exception. The downside is short to medium term volatility. Values can be quite alarming - often causing inexperienced investors to "cut and run" thus turning a "paper loss", which may have recovered, into a "real loss".

Equities should be treated as medium to long term investment and only medium to longer term money should be committed to them.