From childhood, most of us are told to put away money to save for the future – perhaps for something special; or maybe to be sure that when we really need something we have the funds to acquire it, without taking on debt. People’s aims are broadly the same; to provide for future needs, and to protect ourselves against unexpected expenditure, events and inflation.
When planning your finances, it is important to distinguish between savings and investments. Savings are generally funds that you set aside that can be accessed relatively quickly. These savings are often for a specific need or purchase, like a holiday or a new car. The most common way of saving is into a bank account (‘deposit’ account) where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back and possibly some interest. In other words, the original capital is guaranteed.
Investments are designed to be held for a longer term, usually at least 5 years. You need to be comfortable with tying up this money for a period of time and should not consider investments unless you have some savings in place. Most investments are not guaranteed to return your money in full, although do offer the prospect of potentially higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your investments.
The value of investments may fall as well as rise. You may get back less than you originally invested.
Whether you are looking at investing in a pension, an investment bond or ISA (Individual Savings Account), you might consider using investment funds. A fund is capital belonging to numerous investors, held in one place and used to collectively purchase securities, while each investor retains ownership and control of his own shares. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power.
Typically, these pools of money are run and managed by an investment specialist. The manager is paid to make the day-to-day decisions of where the pooled money is invested. The fund manager uses their expertise to make suitable investment decisions in order for the value of the pooled fund to hopefully grow over time.
Another advantage of pooled investment is being able to diversify.
All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount originally invested. To enable funds to be able to manage risk, the manager will practice some level of diversification. This works on the premise that holding two different shares is better than two of the same shares. This is because all shares react differently to investment conditions and changes.
For example, imagine that there are only two companies, one company making t-shirts and one company making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the t-shirt company as they expect demand for t-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling, the other is able to support and perhaps offset the falls, meaning that the investor doesn’t suffer a loss.
The value of investments may fall as well as rise. You may get back less than you originally invested.
All types of shares have different characteristics and these characteristics are complex. Fund managers assess and measure these features and make investment decisions based on their knowledge and market experience.
Investment funds will have a particular aim and often belong to a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund remain aligned with the objectives and specification of the fund.
Sectors and Assets – The fund sector identifies the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry. For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in ‘technology’ companies (IT, telecoms etc). In addition to this, there are sectors that are a mixture of assets. A typical ‘balanced managed’ fund will have some money invested in equities, some in property and some in fixed interest investments or bonds.
Although there are no guarantees as to performance or returns from any sector, our knowledge, experience and insight can indicate how we might expect investments to perform.
There are so many different asset types in which to invest, and here we look at just a few key areas:
The income yield that is available from fixed income investments varies according to their quality. Lower quality (junk or non-investment grade) issues usually offer a higher yield to attract investors (as they may be otherwise put off by the increased risk/volatility) whilst gilts generally offer much lower returns; they are underwritten by the government and so the risk of default is much reduced.
Added to the rental incomes, property has the added attraction of potentially appreciating in value over time, and although property values do fall, the ‘bricks and mortar’ assets of a fund remain. However, returns from a property fund are not guaranteed and the value of any such investment can fall as well as rise.
Furthermore, because of the nature of property as an asset it may not always be possible to immediately switch or cash-in your investment, because the property in the fund may not always be readily saleable. If this is the case then a fund manager may defer your request to cash in for a period of time. You should bear in mind that the valuation of property is a matter of the valuer’s opinion, rather than a matter of fact.
All these types of investment are available through your financial adviser. You may be able to include your investment within a tax-efficient product such as ISA (Individual Savings Account) or even a pension. There is a vast array of products available with which to save and invest, so choosing the most suitable one can be difficult. Why not let your Financial Adviser help you to decide which is most suitable for you?
The value of investments may fall as well as rise. You may get back less than you originally invested.
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