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Understanding Investments Types of Investment

The Market

You cannot predict the future movements of the market, nobody has a crystal ball. To make money from the markets you need to create an edge over other participants in the market. The market has thousands of products. The key is to simplify and specialize. If you are a new investor, you will probably want to familiarise yourself with the administrative aspects of trading.


Choosing the right investment strategy and account type is easier if you first take some time to assess your current financial situation and your reasons for investing. Choosing the right investment strategy and account type is easier if you first take some time to assess your current financial situation and your reasons for investing. If you are having trouble clarifying your goals, it may help to talk to a broker or an independent financial adviser.

Choosing the right investment strategy and account type is easier if you first take some time to assess your current financial situation and your reasons for investing.

Diversification

Before choosing your investments, think about the amount of time you can leave your money in the market.

Shares offer the greatest chance for growth in the long term. However, if you only have a few months to invest, their volatility could leave you with losses. That is why you should always estimate when you might need your money again and invest accordingly.

Always remember that the value of investments can fall as well as rise and you may get back less than you initially invested even in the long term.

If you are unsure about investing you should seek independent advice

Short-Term approaches

If you only have a few years – or a few months – before you will need to pull your money out from the markets, you may want to look for low-risk, low-volatility investments.

A good short-term portfolio may include high exposure to bonds, as well as cash or cash-like investments. Some investors may also want to include some holdings in lower-risk shares from well-established companies. This kind of portfolio tends to be used by people who are close to retirement or close to the end of their investment term.

Looking at the medium term

With five or more years, you can start looking at a more traditional portfolio, with a diverse mix of equity balanced with some holdings in bonds and cash. This is because in a typical economic cycle, five years is enough to recover from any significant downturns. However, this is not guaranteed. Volatility in recent years has had a significant impact on these funds.

Long-term investing

Younger investors saving up for retirement may find that they have 10 to 20 years or more before they will need to start drawing down money from their investments.

With the luxury of time, you may want to consider riskier and more volatile investments. While there are no guarantees, by taking on greater risk, you may earn a higher return. Such a portfolio may tend to be very volatile and should only be used for a small portion of your investment. A downturn can hurt your portfolio, but you would be able to afford the wait for the eventual recovery. Then, as you approach retirement, you can slowly transition to safer investments in order to protect your gains. Too much high risk can seriously impact your fund value.

Investment lifecycle

Before you decide how to invest, learn about the potential risks and rewards of the 4 main kinds of assets – shares, bonds, property and cash.

There are several different classes of asset, each with its own strengths and risks. By spreading your money across a range of assets, you can create a portfolio that balances risk, growth and income according to your priorities. Spreading your money out across assets in this way is called diversification. It can help you (lower overall risk), since different kinds of assets perform well at different times.

  • Shares are high-risk investments, but they offer the best long-term returns;
  • Bonds are investments that can provide a steady income;
  • Property, particularly buy-to-let property, takes time to manage. But the potential rewards include income from rent and capital gains if housing prices rise;
  • Cash is a safe and familiar asset, but one with very low returns.

By spreading your money across a range of assets, you can create a portfolio that balances risk, growth and income according to your priorities.

Doing more with your cash

Cash is an important piece of any investment portfolio. Keeping some of your assets as cash is helpful for short-term needs. For example, if you need money for an emergency, having cash on hand means you can avoid having to sell investments at a loss.

The risk of holding cash is that over time, inflation can erode your money’s buying power. For that reason, most investors use at least some of the following products to ensure their cash earns as high a return as possible:

Savings accounts

By keeping your money in a savings account, rather than a current account, you can earn a small amount of interest without tying up your money.

Term deposits

These offer a higher interest rate, but you have to agree to leave your money in for fixed number of months or years. There is a penalty for taking out money early.

Money market funds

These funds aim to earn a better return than the typical interest rates offered by banks. They do this by using a combination of cash instruments, such as deposits, term deposits, and short-term interest-earning securities. They can earn you a better rate, but returns are not guaranteed and there is a chance you may be asked to defer withdrawals. Unlike savings and deposits, you might get back less than you initially invested.