In a free market economy, you can only accumulate above normal wealth by taking above normal risk.

My advice to anyone who generates free cash flow from their job or profession, is to get that money back into the risk economy, through either listed shares or investment property – the two asset types that benefit most from our open economy. Later bonds are added to balance the risks.

In those three asset categories, tradeable shares and bonds and property, you have the access to the highest returns in exchange for an acceptable risk. And when you stretch the time frame out to a business cycle (say 7 years) the risks tend to become very low and returns very high.

You may be tempted by what lies outside this circle of three classic assets, by looking for higher returns from privately offered property syndicates, forestry, share schemes, tax haven investments, high yield lending, forex trading and so on, and you could be making a very big mistake.

There is no transparency in most of these alternatives, anyone can tell you anything.

New Zealanders lost billions in privately owned property syndicates and finance companies in the 1990s. Forestry investments cost their shareholders millions when the IRD successfully claimed in court they were tantamount to tax evasion a few years ago. Forex trading scams are exposed daily. Private investment schemes turn out to be Ponzi scams time and time again. Why would one even be tempted into such risk?

The three classic assets – shares, bonds and property – are transparent and their risks controlled. The other categories are difficult to get to grips with and should only be contemplated by wealthy investors. (Wealthy would be defined as having a paid off house and minimum $3 million invested in the classic three categories).

Of those three, the share market is the core of a portfolio. It generates the capital gains of property with the added benefit of liquidity – shares can be sold and turned into cash in minutes, property can’t. But property has proven itself to be an acceptable alternative to shares and is well understood by New Zealanders.

Many of my clients own investment properties alongside the other assets I manage for them, and although I have little expertise in property investment, I recognize just how well it sits in a diversified portfolio alongside shares, bonds and cash, given they all follow different cycles with different risks.

Bonds are added to the mix because of stable income and their tendency to increase in value when the economy is in trouble, rising when shares are falling. This diversifies the risk when you most need it.