Types of Investments

When creating a portfolio it is crucial to understand the amount of risk you are willing to take, and your investment objectives over the short, medium, and long terms.

Learn more about the types of investments available

Cash

Cash is the asset class with the least associated risk and is useful as part of a diversified portfolio as it offers security and easy access. There are many places you can hold cash, with banks and building societies offering cash savings accounts. Whilst cash offers the benefit of easy access, it tends to provide lower long-term returns than other asset classes and its value can be eroded by inflation.

Equity

People invest in shares in anticipation of an increase in their value, and/or the receipt of a regular income through dividend payments. Whilst history should not be considered a guide to the future, it does show that over the longer term equities tend to outperform other types of investment. Of course, shares can be volatile, and their value can go up as well as down and you may not get back the full amount invested and the fortunes between different shares can vary dramatically.

Bonds

Bonds tend to fluctuate in value less than shares and should repay your original investment at the end of a fixed term. However, the scope for your money to grow is usually limited in comparison to the growth achieved historically by shares, and there is the possibility that the issuer could default on the loan.

Fluctuations in interest rates can also affect the value of a bond – generally when interest rates rise, bond prices fall and vice versa. Although bonds are usually considered medium risk, this depends hugely on who is issuing them. Bonds issued by the UK Government are called Gilts and are very safe, whilst the risk involved in corporate bonds is dependent on the business issuing them. The level of income a bond pays reflects the risk you are taking – a company with a higher risk of default will have to reward investors with a higher yield.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

 

Property

The family home is the most significant investment many of us will ever make, and one that given time is likely to net a tidy profit. Returns from property investments tend not to be closely correlated with those of shares or bonds. This makes it useful from a diversification perspective introducing another source of capital growth potential and income into your investment portfolio. Although property tends to be less volatile than equities and bonds, its value can fall as well as rise. It is also less liquid than other assets, meaning that it takes longer to invest into, and also to access your money when you need it.

Collective investments

Investing in individual companies carries more risk and requires more knowledge to make the right choices, to monitor your investments, and make changes as necessary. For these reasons, adopting a collective approach can be extremely beneficial when entering the world of investing. Mutual, pooled, or collective funds are offered by investment management companies and provide easy access to a range of asset classes. When you invest in a collective, your money is added to that of many other investors which professional fund managers then invest in a range of different assets e.g. equities, bonds, property etc. Because your money is pooled with other investors, it means that even if you only have a small amount to invest, you can access a range of investments that otherwise you might not be able to.

 

It pays to think carefully before choosing investments

Like all aspects of financial planning, it is sensible to speak to an expert before choosing which type of investments to commit to. We can advise on the options which may be prudent to consider.

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