|
|
|
When investing, you take calculated risks to increase your chance of getting higher returns on your money, especially over the longer-term (money you can afford to tie up for five years or more). This section will explain the most common types of investments, how they work and what you need to think about before choosing one or more.
What are investments?
There are different types of investments but, basically, you take a risk with your money by investing in assets that could rise or fall in value. There is no guarantee you will make a return on your investment or even that you will get back the same amount you invested in the first place. Investments are different from savings – they are typically designed for the longer term and involve different types of risk.
Before investing it’s usually a good idea to have sorted out your debts, made sure you’ve looked at protecting yourself against unforeseen events — see our section on protection by clicking here
|
|
|
And, once you start investing, it’s highly advisable to spread your risk – don’t put all your eggs in one basket, this is called :-
Diversification
These risks can be reduced – but not eliminated – by diversification. Diversification simply means spreading the risk of investing over a range of investments; not putting 'all your eggs in one basket'. There are two main advantages of this:
Minimising the impact of individual losses
Simply put, if you use all your money to buy shares in a single company and the company goes bust, then you are going to lose a lot – or all – of your money.
If you use your money to buy shares in 100 different companies, assuming that you invest an equal amount of money into each one, and one of the companies goes bust, then this will not have a significant effect on your overall investment.
If you have a lot of money then you can invest directly and create a wide spread. However, most investors need to use pooled investments to achieve a good spread.
This is the key way to reducing the risks of individual investments (whether shares, bonds, property or cash). However, it may have little impact on the risk of wider economic problems.
As we explain in shares, the price of shares is likely to be affected by the outlook for the economic environment in which companies operate. If an economy goes into recession this may affect the share prices of many companies and the value of an investment, even across a broad range of companies, may go down.
|
|
 |
Spreading your investment
This is the key to successful investing and is called asset allocation. Asset allocation simply means how you spread your money across the asset classes – how much you have in shares, bonds, property and cash respectively.
If you choose to invest in pooled investments it is also certainly worth considering spreading your risk across those holdings too. For example, a fund which invests only in one industrial sector, such as technology, will invariably be more risky than funds that invest across the whole range of companies in a market.
The asset classes all work differently and are largely independent of each other. If one is going up, another might be going down. It would be very unusual for all asset classes to be going down at the same time.
For example, between 2000 and 2003 the top 100 UK shares (the FTSE100) went down by around 50%. However, property values increased significantly (and bonds and cash also went up). If you had just invested in shares then the value of your investment would have reduced significantly. If you had invested across the asset classes then the loss would have been much less.
You can also diversify within an asset class. Each asset class is made of different types of investment within. For example, for shares you can spread your investment between the UK and overseas markets, between large and small companies, and so on.
Asset allocation
There are many factors to achieving a good return on your investments – for example:
picking the right individual investment(s),
judging when to invest, and
asset allocation.
By far the most important of these is asset allocation.
The right asset allocation for you will depend on what you are trying to achieve with your money, how long you are prepared to invest, and your attitude to risk. Here at CRM & AGM Independent Financial Advisers we can help you to recommend a suitable diversification and asset allocation strategy to match your individual attitude to investment risk. Please click here to take advantage of a free initial consultation with one of our qualified advisers.
|
|
|
|
|
|
|
