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Assets You Can Invest In - Cash - Bonds - Property - Shares | "The sooner you invest, the more time your money will have to grow, and benefit from compound growth." | | The sooner you invest, the more time your money will have to grow. You will also benefit more from "compounding", which is the snowball effect you have when the growth your investment has achieved also starts to grow. If you delay, you will probably have to invest much more to achieve a similar result. | It is difficult to make the right decisions about where to put your money unless you know a little about the various types of investments available. In addition, it is worth noting that with the exception of cash, all other types of investment - and the income from them - can fall in value as well as rise. If you already have a number of investments, thinking of them as a portfolio may give you an idea of how they are working together to achieve your goals. | Different investments suit different people at different stages in their lives and few people choose just one investment. Most investors choose a variety of different holdings, which together make up their "portfolio". | | "Different investments suit different people at different stages in their lives" | When you are comparing investments, you need to think about whether you will need your money in the next few years. Back to start of page Assets You Can Invest In There are 4 main types of asset that you can invest in:- -
Cash - deposit accounts with banks & building societies. -
Bonds - which are company or government IOUs. As a bondholder, you are a creditor. -
Property - residential and commercial buildings or property-related shares. -
Shares (or equities) - where investors own a share of a company. These "asset classes" perform very differently. Back to start of page Cash | Advantages - Your capital will not go down in value. | | Cash/Deposit accounts may not carry any of the risks associated with bonds or shares but that does not mean they are risk-free. There is always the danger that inflation will eat into the value of your savings. | Your real return - the amount of interest you earn above inflation - can be a very small margin. If your account pays 5% but inflation is running at 2%, you are only making 3%in real terms. A small rise in inflation or a slight drop in interest rates could make a significant dent in your returns. If your savings are taxed, that real return of 3% will be reduced even further. For a basic-rate taxpayer the result would be a real return of just 2%. | Cash is good for emergencies and for short-term plans, such as saving for a holiday or for the deposit on a new home. It can also be a key investment for people who are not prepared to take much of a risk with their money. | | Disadvantages - Less growth potential than other investments. Inflation may erode your returns and reduce your purchasing power. | Back to start of page Bonds | Advantages - Less risk than shares, but more growth potential than savings accounts. They also pay regular income, which can be reinvested for long-term growth. | | Although less exciting than shares, bonds play a critical role in our economy and an important role in every well-balanced portfolio. | Returns from bonds are generally lower than shares, however, they're a much safer investment. Bonds safety and stability act as a counter to the fluctuations common to shares. The inclusion of bonds in a portfolio helps balance other investments. The more risk you are able and willing to take the higher percentage of shares in your portfolio. The more conservative investor will want a higher percentage of bonds. | Bonds pay regular interest - if you don't need this income, you can reinvest it to achieve extra growth for the future. | | Disadvantages - Not as secure as a savings account, and bond funds can go down in value but not to the same degree as property or shares. | Back to start of page Property | Advantages - House prices can rise dramatically, and a property should give you a place to live or a rental income. The same is true of commercial property funds but with the added benefit of your money being invested over a number of properties. | | Most people already have a significant proportion of their wealth tied up in their home. This may well have gone up in value over the years, but that does not necessarily mean it would be wise to make extra property investments. The more you invest in property the more you stand to lose if house prices fall - particularly if you have a mortgage. | Your mortgage won't fall in value just because your property does. You could even find yourself with "negative equity". This is where the value of a property is less than the mortgage. Even if property prices continue to rise, individual properties can be affected by problems beyond the owners' control, such as flooding and noisy neighbours. With a buy-to-let property, rents may fall, it can be difficult to find tenants and meanwhile you will still have to pay the mortgage. | None of this is a reason to avoid property altogether - after all, everyone needs somewhere to live and most of us prefer to buy our own home. But you need to bear these factors in mind if you are thinking of investing in property. It may be best to think of property simply as one aspect of a balanced portfolio, not as the mainstay of your financial planning. | | Disadvantages - Property prices can fall. It can be a lengthy process to buy and sell a property. Mortgage and maintenance costs can be high and are subject to unpredictable change making property a highly illiquid asset. | Back to start of page Shares The stockmarket may be better for long-term investment. | Advantages - Good long-term growth potential. Managed funds allow you to invest in hundreds of company shares and a broad range of markets and offer flexible ways to invest and withdraw money. | | If you are thinking about investing in stocks and shares, it's also important to be sure you are comfortable with the risks involved. You can only benefit from the long-term growth potential of the stockmarket if you are prepared for some short-term risk. This means, for example, not giving up on an investment if you find out that it has fallen in value. | A stockmarket investment can achieve significant growth but there may be setbacks along the way. If you couldn't accept an investment falling in value like this, you probably need to look at secure investments, such as savings accounts. | The stockmarket could account for the bulk of your investments if you are relatively young and want to maximise your money's growth potential. But if you have less time until you need your money, you will probably want a smaller proportion of your portfolio invested in shares. Of course, with people living longer and the potential of a longer life in retirement, it's worth remembering that there may still be a need to keep some exposure to the stockmarket, even when work is a thing of the past. | | Disadvantages - Because shares are part ownership of a company they fluctuate in value and involve more risk than bonds and deposit accounts. | Back to start of page Understanding Investment Risk There are risks involved in shares, property and to a lesser extent in bonds, as these investments can fall in value. However, this has to be balanced against the growth potential they offer. Shares, in particular, can rise significantly over a number of years as well as pay a dividend income. If you're aiming for long-term growth, you can't avoid risk - but that doesn't mean you should ignore it either. There are some useful strategies you can use to help keep it in perspective. | "...you can't avoid risk if you are aiming for long term growth." | | Think of risk as an opportunity - "nothing ventured nothing gained" applies just as much to the stockmarket as to other aspects of life. Share prices often fall. But investors who let this put them off cannot benefit from the times when the market rises. You need to accept that there may be occasional downturns in the markets if you want to benefit from the long-term growth that the stockmarket has the potential to generate. | Invest in managed funds rather than buying shares yourself, you can have an expert looking after your money in a managed fund. Money from thousands of investors is pooled, and the fund manager buys a broad selection of shares, so you do not lose too much if a single company's shares fall in price. Have a variety of investments. It's rarely a good idea to concentrate on just one type of investment. 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