A Beginner’s Guide to Understanding Investments

Classes of investment

Managing your money wisely is one of the cornerstones of creating long term wealth. In order to do this you need to understand the various ways to invest and the risks and rewards involved.

Here are the main classes of investment, known as asset classes available when looking to invest money.

Cash

Saving your money in a building society or bank is a simple low risk investment. You will receive interest on your investment and you have access to your savings when required. Plus your capital is not at risk unless the bank goes bust.

Fixed Interest Bonds

With this type of investment you invest a lump sum for a set period of time with a set amount of interest paid over that period. You cannot access your money during this period without incurring a penalty, typically a loss of interest.

Equities (shares)

This is an investment where you are buying a stake in a company to produce growth in the value of your share together with an annual return (dividend). This type of investment is higher risk as the value of your shares could go down and even be worthless if the company concerned goes into liquidation. This asset class is viewed as a medium to long term investment, typically 5 years or more.

Property

This where you invest in a physical building either residential or commercial and obtain a return through the annual rent received together with any growth on the property when it is  eventually sold. This asset class is viewed as a medium to long term investment, typically 5 years or more.

Investment risk

Every investment has an element of risk involved and understanding this risk and your attitude to this risk is a key element in deciding your investment strategy. Generally speaking the higher the risk the greater the potential return, but also the potential loss. Here are the broad risks involved in each investment asset class.

Cash

This is the least risky of the four main asset classes but the potential returns are lower and the value of your money could be eroded in times of high inflation.

Fixed Interest Bonds

The risk in investing in government bonds, or gilts, is low with a slightly higher risk if you invest in investment grade corporate bonds. Corporate bonds are issued by companies looking to raise capital and are considered riskier than gilts as companies are more likely to default than governments.

Property

Investing in residential or commercial property has a higher risk involved due to the unpredictable elements in this type of investment. Rental returns can be variable, if a reliable tenant cannot be secured, and capital growth can be variable over the short term.

Equities

These are considered the most risky asset class as company performances and stock markets can be highly unpredictable. Investing in large corporations is considered a lower risk than investing in smaller organisations or emerging markets such as India or Brazil.

Types of investment

Direct investment

This is where the investor directly purchases the asset (e.g equity or property) and makes all the investment decisions personally. Investing directly in any asset class can be risky as the knowledge required to invest successfully is high.

Investment funds

These are a collective investment scheme that pools your money with other investors to provide you a stake in a ready made portfolio. An investment fund can offer an affordable way of investing in a number of asset classes without the need to make your own investment decisions. This makes investing a lot simpler and are a popular way for private investors to access markets that they would have not otherwise done. 80-20 Investor focus on investing via funds such as unit trusts, investment trusts and ETFs.