Asset classes such as stocks, bonds, real estate, credit instruments, cash equivalents and private equity investments may react in different ways to economic factors and global events. For instance;

Interest Rates: Stocks tend to do well when interest rates are low, since they benefit from borrowing costs and increased consumer spending. On the other hand, bonds may suffer when yields drop, affecting fixed income investors' returns.

Inflation: During times of inflation, commodities like gold often perform strongly as they serve as a safeguard against declining currency values. Conversely, high inflation can diminish the purchasing power of cash holdings and fixed income investments.

Global Events: Events such as political turmoil, wars or trade disputes can lead to market instability. For example, equities in affected regions might experience declines while safe haven assets, like gold or government bonds, could see gains.

How asset classes can react to market conditions

Recognising the potential returns from different asset classes is crucial for long-term investment success. Each asset class has distinct characteristics:

1. Global equities: Historically global stocks have shown higher returns compared to other investment options, but they also come with increased volatility. Data from the MSCI World Index indicates that as of December 2023 global equities have delivered a return of about 8.7% since 1994. This consistent performance highlights the growth opportunities associated with stocks, albeit with fluctuations.

2. Australian Equities: Australian stocks have also displayed strong returns over time. The Australian Securities Exchange (ASX) reports that the local stock market has generated an average annual return of 10% since 1994, reflecting the strong performance of domestic companies and Australia's economic resilience. However these returns are accompanied by a level of volatility compared to stable asset classes.

3. Bonds: Bonds typically offer more stable returns. For example, Australian bonds have historically provided a return of 5.6% since 1994 as per data from Bloomberg AusBond Composite 0+ Yr Index up to December 2023.

4. Real Estate: Real estate investments can offer an income stream and potential appreciation, in property value. Throughout history, the Australian housing market has shown growth rates averaging  9.0% per year between 1994 and 2023, based on S&P/ASX 200 A-REIT Total Return Index.

5. Cash: Holding cash or cash equivalents typically provides lower returns compared to other asset classes. For example, cash investments in Australia have yielded an average return of 4.3% per annum since 1994, based on the  Bloomberg AusBond Bank Bill Index. While cash is low-risk and offers liquidity, its real returns can be negatively impacted by inflation.

6. Credit: Credit investments involve lending to corporations and can yield higher returns than government bonds, albeit with higher risk. For instance, corporate bonds and other credit instruments have shown average annual returns between 4-6%, reflecting their risk premium. Credit markets can be sensitive to economic cycles, with returns varying based on credit quality and prevailing interest rates.

7. Private Equity: Private equity can offer higher returns compared to public equities, although it typically involves higher risk and lower liquidity. Data from the Cambridge Associates Private Equity Index indicates that private equity investments have returned an average of approximately 14.71% annually between 1999 and 2023. This performance demonstrates the potential of private equity to deliver significant returns for investors willing to accept the associated risks and longer investment horizons.

In summary, comprehending the returns of asset classes and the factors influencing them is crucial for devising an investment plan. Regularly evaluating and diversifying your portfolio can assist in navigating market fluctuations and realising long term investment objectives. It's advisable to seek guidance from a financial adviser to tailor strategies according to your circumstances.