A quick guide to 4 investment options
Once you’ve decided that you’re ready to invest, the next step is to choose where to invest. When you look at your options, you may be surprised by how many there are. Breaking the decision into smaller steps could help you get started. The first is to pick the ‘asset classes’ you want to focus on.
Asset classes are a way of grouping similar types of investments. Each has its own risks, rewards and characteristics. You might want to start with a fund focusing on one asset class, a selection of funds investing in different asset classes or a fund that invests across the asset classes for you.
It is worth remembering: even though investments within an asset class share some features, this doesn’t mean they all perform the same. For instance, one stock or share can do well, while another does poorly.
Bonds (also called ‘fixed income’)
A bond is just another way of saying a loan. When someone buys a bond, they are loaning money to a government or company.
What they offer you
Most bonds pay a fixed rate of interest for a fixed amount of time and then return the initial loan when the bond ends. Higher-risk borrowers pay more in interest than lower-risk borrowers.
What risks they involve
Bonds tend to see steadier performance and are usually less risky than shares – but they are not risk free. Their price can change depending on several factors, including how valuable their interest rate is to investors. Plus, there is the risk a bond issuer might default on the interest payments or returning the amount borrowed. This is called credit risk.
Risks listed are not exhaustive; other risks may also apply.
How to invest in them
It is possible for individuals to buy some bonds themselves, but for most people, the easiest and most effective way to invest in bonds is through a fund.
Property
Investing in property normally means buying commercial or residential buildings or the shares of property development companies.
What it offers you
Returns on property investments are typically linked to rental income, though there is the potential for capital growth when property prices rise. Property may appeal to investors who like the idea of buying something tangible that could diversify their portfolio.
What risks it involves
Property can be tough to sell in a crisis. This can mean investors may be unable to get their money when they want it or have to accept a lower valuation. This is called liquidity risk and it means property should be considered a long-term investment. Property also tends to take longer to sell than most other types of investment.
Risks listed are not exhaustive; other risks may also apply.
How to invest in it
It is possible to buy the shares of property development companies directly and residential property can be bought as a buy-to-let. However, individuals normally have to use a fund to benefit from the full range of this asset class, particularly commercial property.
Shares (also known as ‘equities’)
Buying a share means you’ve bought part ownership of a business.
What they offer you
If the company does well, a share will tend to rise in value. Plus, some companies pay out a proportion of profits in the form of dividends. Shares also tend to be very easy to buy and sell (so they have low liquidity risk).
What risks they involve
Shares are typically seen as one of the riskier types of investments because their value can move up and down very quickly. Companies can also become insolvent, which may mean a share ends up having no value.
Risks listed are not exhaustive; other risks may also apply.
How to invest in them
Shares are usually traded on the stock market, so it’s possible for individuals to buy them directly. Unless you have a larger sum of money to invest, though, you may find it easier to hold a diversified mix of shares through a fund.
Alternatives
The easy way to describe alternatives is that they’re everything we haven’t already covered on these pages. For example, they include infrastructure, commodities and private equity.
What they offer you
Alternatives often perform in a different way to the main asset classes (this is called having a ‘low correlation’). It means they can be an effective way to add diversification to a portfolio, which may reduce the overall level of risk. Some higher-risk alternatives offer high growth potential, while others may be more steady performers.
What risks they involve
Each type of alternative investment has its own risks. In general terms, though, they tend to be more complex. This increases the potential risk of correctly valuing them and can make them harder to sell if the money is needed quickly. (Higher liquidity risk.)
Risks listed are not exhaustive; other risks may also apply.
How to invest in them
Some alternatives are much more straightforward to invest in than others. To benefit from a wide range of alternatives, a fund can be an easy option.
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Risks listed are not exhaustive; other risks may also apply. Additional costs, such as management fees, are involved when investing in a fund. This may reduce overall returns.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.