Before we get started it’s important to understand the basics of investing.
So,
Why invest?
If you’ve got money sitting in a savings account, it’s likely to be earning little or no interest.
It’s important to keep some money, as your rainy day money. Our view is you should keep enough in your savings account to cover 3 months outgoings.
But if you’ve got more than that sitting in a savings account, you could effectively be losing money in real terms.
That’s because the returns you’re getting could be less than inflation. Put simply, this means the buying power of your money could be falling over time.
So, investing gives your money the chance to work harder over the longer term.
The next big question is …
Where to invest?
There are four main types of investment, also known as ‘asset classes’
These are:
Shares, this involves buying shares (also known as equities) in a company.
Commercial property involves buying property including retail, office, industrial.
Bonds are loans taken out by a company or by governments. UK government bonds are referred to as Gilts.
And cash, includes things like currency and deposit accounts.
Each of these asset classes have different levels of risk and potential rewards.
With all types of investing, the value can go down as well as up, so you might not get back what you put in.
That’s why, before you invest, it’s important to understand the different risk and rewards.
Let’s look at each asset classes in a bit more detail
Shares generally offer the most potential growth but carry the highest risk. That’s because the value of shares can quickly rise or fall.
Property can provide a regular income which can increase, if property prices rise. But if a property is empty or property prices fall, then the income could stop or go down. Property can also take a while to sell.
Bonds provide regular returns, but there’s always a risk that a company could go out of business. And there is even a risk that a Government can’t pay back a loan so could default on a bond.
And cash provides steady returns, but inflation could eat away at the value
But Investing is all about trying to find a balance between risk and reward. So you'll need to think about how much money you could afford to lose, as well as what type of risks you can, and are comfortable, taking.
Understanding volatility
If an asset class rises and falls rapidly over a short period of time, it’s considered to be more volatile.
The more volatile an asset class is - the higher the risk usually is.
Asset classes that achieve higher growth, can also experience greater losses at some point. Those that achieve lower growth can experience less dramatic downturns.
So the volatility of your investment is another important factor to consider.
The importance of spreading your investment
Different types of asset classes are likely to perform well at different times. So, the problem is knowing what you should invest in?
For example, one year shares may be performing well and bonds may be underperforming. The following year bonds might be outperforming shares.
Overall what performs best and worst one year, could be very different the next. And what happens in the past isn’t a guide to what might happen in the future.
So, in this example if your investment is spread across both shares and bonds, over time the returns are more likely to be consistent than a fund which only invests in just one type of asset.
That’s why many people choose to spread their money over a variety of asset classes. This is known as diversification.
By spreading their money this way, they’re able to potentially gain some exposure to the higher performing assets without the risks of investing in just one asset class.
So they avoid putting all their eggs in one basket.
This is called multi asset investing.
There’s a range of multi asset solutions available, with the potential to achieve more consistent returns than funds invested in a single asset class.
These are managed by investment experts, highly experienced in managing multi-asset funds. And there’s a range of options designed to meet a variety of different needs.
To find out more, speak to your Financial Adviser.
