What Are Investments?
Investments are something you buy or put your money into to get a profitable return.
Most people choose from 4 main types of investment, which are grouped according to characteristics they have in common. These are known as ‘asset classes’:
Shares: You buy a stake in a company.
Cash: The money you put in a bank or building society account.
Property: You invest in a physical building, whether commercial or residential.
Fixed interest securities (also called bonds): IOUs given in return for loaning money to a company or government.
The various assets owned by an investor are called a portfolio.
As a rule, spreading your money between the different types of asset classes helps lower the risk of your overall portfolio underperforming but more on this shortly.
Returns
Returns are the profit you earn from your investments. Depending on where you put your money it could be paid in several different ways:
Dividends: From shares.
Rent: From properties.
Interest: From cash deposits and fixed interest securities.
The difference between the price you pay and the price you sell for – capital gains or losses.
With an instant access cash account at the bank, you can withdraw money whenever you like and it’s generally considered a secure investment.
How Fees Reduce Investment Returns
Managing investments takes time and money and service providers (such as fund management companies) and financial advisers (like little old me!) will charge a fee.
It’s important to know what these costs are. They have an impact on the growth of your investment so you should try to keep them as low as possible.
Unlike a lot of things in life, when it comes to investing, expensive doesn’t always mean good! Sometimes, investments can be VERY expensive and shaving off a few percentage points can make a big difference!
Risks
None of us likes to gamble with our savings, but the truth is that there’s no such thing as a ‘no-risk’ investment.
At the heart of investing there is a simple trade-off: the more risk you take, the more you can get back (or lose). The lower the risk you take, the less you’re likely to get back (or lose).
But while you’re always taking on some risk when you invest, the amount varies between different types of investment.
Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time. That’s because the interest rate paid won’t always keep up with rising prices (inflation).
On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates which means if inflation falls you could earn less in interest than you expected.
Stock market investments are generally expected to beat inflation and interest rates over time but you run the risk that prices might be low at the time you need to sell and will go up and down along the way.
This could result in a poor return or, if prices are lower than when you bought, losing money.
When you start investing, it’s usually a good idea to spread your risk by putting your money into several different products and asset classes. That way, if one investment doesn’t work out as you hope, you’ve still got others to fall back on.
When Should You Start Investing?
If you’ve got plenty of money in your cash savings account (enough to cover you for at least 3 to 6 months) and you want to see your money grow over the long term, then you should consider investing some of it.
The right savings or investments for you’ll depend on a range of different factors, such as your financial situation, life circumstances, risk appetite and your future goals.
But, in the long-run, investing will give you a good chance of beating the key enemy which is inflation, even though, it could be a bit bumpy along the way!
Even if you’re older and might not have a long time horizon ahead, it could be that your loved ones pick up from where you left off so keeping your money invested could still be the right thing.
My Take on Things
The way I approach investing is very simple and brings together all the aspects I’ve just told you about. It doesn’t have to be complicated. Spread the risk, keep the costs low and, perhaps most importantly, don’t take knee-jerk action during times when markets are falling.
It’s not easy to be invested at the moment, I completely understand that. Bank / building society interest rates seem to be very attractive and you’re taking no risk with them.
That said, as long as the interest rate you’re getting on your cash is below inflation, you’re effectively GUARANTEEINGa loss in terms of the real value of your money so be careful.
Hope it Helped
I hope this was a useful read. You know I’m here if you need to talk to me and I look forward to seeing you soon…