Managing investment risk
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Here’s a simple guide to the different types of assets and investments available to you. An asset is anything of value that somebody can own. For investments, it's used to describe the four main types of asset that can be bought; cash, bonds, property and equities.
The world of investments can seem complicated and your adviser is the best person to help you understand your goals and how you could meet them.
When you invest through an investment bond, you'll usually invest into a number of funds. The fund manager is responsible for deciding which assets to invest in. This overview aims to help you understand the main types of asset and their key risks.
Cash generally means deposits with banks and institutions which then pay interest on those deposits. Cash is the lowest risk asset class – this means that returns are often lower over the medium-to-long term (five years and over) than those achieved by other asset classes.
You might see terms like near-cash or money-market used. These can mean low risk assets that are similar to cash, however they're not the same and could have a slightly higher risk. It’s always important to get a good understanding of exactly which assets an investment holds before investing your money.
Cash assets can be a useful place to invest if you’re looking for something low risk. However, they might not be suitable if you’re looking to invest for a long period, due to inflation.
If inflation (the rate at which the general level of prices for goods and services changes) is rising, then over time this reduces the value of the money you have. If a cash investment is growing by less than the rate of inflation, then you would lose money in real terms. There is also the risk of an institution going bust and losing the cash investment. However, this is very unusual and fund managers will look to only put cash with, or buy money market assets from financially strong institutions.
A bond is a loan from an investor to a government or a company that’s looking to raise money. To make bonds attractive to buy, the government or company issuing the bond offers to make regular interest payments and pay the loan back, usually at a fixed date in the future.
Bonds issued by the UK government are called gilts. These bonds are generally seen as safe because the repayments are guaranteed by the government. Bonds issued by governments from other countries may be higher risk, depending on the risks associated with that government and country.
Bonds issued by companies are called corporate bonds. Bonds issued by large, well-known companies are usually seen as less risky than bonds issued by smaller, less well-known companies that could have a less secure future. Corporate bonds are generally viewed as having more investment risk than government bonds.
The main risk with bonds is that the government or company that issues them could have problems, which may mean that it can’t pay back the loan and investors could lose their money.
Bonds are viewed as having a lower risk than equities and property. However, prices can move up and down on a daily basis and there is a risk that you could get back less than you invest.
When we talk about property as an asset class for investment it usually means the way a fund can invest in commercial property by buying buildings such as offices, shops, industrial units and warehouses.
Investors in a commercial property fund will hope to benefit from growth in rising property prices and rental income. As well as property holdings, some property funds might also invest in the shares of property investment companies.
Property carries a different sort of risk to other types of asset – the value of a property is based on the opinion of a professional valuer and only becomes fact when it’s sold.
This means that there’s a risk that property isn’t priced correctly and could sell for less than expected. Sometimes properties aren’t easy to sell, which means you might not be able to cash in your investment when you want to and there could be a delay in getting your money out of the fund.
Property is generally seen as having a lower investment risk than equities and a higher risk than cash and bonds.
Shares – often called stocks or equities – provide an ownership interest in companies and are usually listed on a stock exchange.
Investors in equities want to achieve capital growth from rising share prices and in many cases, a share of profits through dividend payments. Dividend is the term used to describe the amount of profit that a company decides to share with its shareholders.
Investing is often talked about as a long-term commitment of 5 to 10 years or more. With a long-term commitment, equities usually provide better returns than cash, bonds and property. However, share prices can move up and down on a daily basis, sometimes very sharply. These sudden price fluctuations mean that of the four main asset classes, equities are generally considered to have the highest level of investment risk.
For more information on these asset types speak to an adviser.
The value of your investment can go down as well as up and you may get back less than you invest. Tax rules depend on the type of investment and individual circumstances and may change.
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