Your Financial Architect’s Brief Guide to Investing
Why invest/save?
 To ensure that inflation doesn’t erode the
spending power of your money.
To make your money work harder for you.
To enjoy financial independence in retirement.
A particular goal. I.e. University fees, world cruise
etc
To share in the profitability of businesses and the
growth of the economy
The above are just a few examples of the reasons why our
clients have made investments. They may apply to you or you
may have other reasons.
Whatever is your reason, when investing, you take calculated
risks to increase your chance of getting higher returns on
your money, especially over the longer-term (money you can
afford to tie up for five years or more).
The four main asset classes avalable to
invest in are;
Cash
Fixed interest securities (gilts and bonds)
Property (normally commercial via pooled investments
but can include residential)
Shares (equities)
Cash
You are probably familiar with this type of investment as
most of us have experienced bank or building society savings
accounts. The amount of interest will depend upon the general
level of interest rates set by the Bank Of England, the size
of your deposit and how long you are prepared to give up access
to your money.
Fixed Interest securities
Bonds are issued by governments and companies as a means of
borrowing money. Government bonds are known as gilt-edged
securities or “gilts” while bonds issued by companies
are known as corporate bonds.
Bonds and gilts are issued with a promise that investors’
money will be repaid at a set future date, the so called “redemption
date”. In the meantime the bonds/gilts pay out a regualr
and usually fixed amount of interest. The income you earn
when you hold a bond is known as the bond yield. This is generally
higher than the interest paid on deposit accounts because
bonds can be riskier than deposit accounts. If you need access
to your money before the redemption date, you can sell the
bond to someone else through the open market. The price you
get will be the market price of the bond at the time you sell,
so you may get back more or less than you would if you wait
till the redemption date.
Property
Property is a popular investment asset but it is important
to realise that if you invest directly in property it can
be difficult to get at your money quickly as you will need
to sell the property. Your own property may of course be your
biggest asset, but you cannot benefit from its value if you
also need somewhere to live. You could invest in other properties
such as a buy to let, but it may be better to consider investing
in property via pooled funds. Not only do these normally offer
the opportunity to cash in your investment on a daily basis
(the small print may say the fund manager reserves the right
to defer encashments for up to 6 months in certain circumstances)
but they offer exposure to commercial property investment
such as offices, shopping centres, warehouses etc.
Shares
Shares in a company are just that. As a shareholder you own
part of the company in which you have invested and have a
direct share in its assets and future profits. Part of the
company’s profits may be paid in the form of dividends.
People also invest in shares to make money through an increase
in value, which is reflected in the share price. To convert
shares to cash you have to sell them to someone else in the
stockmarket. The price you get will depend upon a number of
factors such as what other investors think the future profits
of the company are likely to be. What you receive may be more
or less than you originally paid for the share.
The following table explains the different combination of
risks and benefits that apply to each asset class
ASSET |
RISKS |
BENEFITS |
Cash |
Inflation risk
Interest rate risk
Bank/Building Society failure risk |
Capital security
Interest (usually variable) |
Fixed Interest Securities |
Interest rate risk
Default and credit risk
Currency risk (Overseas holdings)Inflation risk |
Opportunity to earn more than a deposit account
Steady income |
Property |
Property failure risk
Difficulty in realising holding
Bad tennants and therefore income risk |
Steady income
Opportunity for capital growth
Protection against inflation – over the long term |
Shares |
Market risk
Currency risk (Overseas shares)
Company failure risk |
Opportunity to earn high returns
Protection against inflation – over the long term,
share prices tend to beat inflation.Income. |
Risk can never be eliminated but it is possible to manage
it successfully. The principle tool is “diversification”
– spreading your risk. You may have heard the phrase
“don’t put all your eggs in one basket”.
This phrase is very appropriate when investing.
Different investments behave in different ways and are subject
to different risks. Investing your money in a range of assets
helps reduce the loss, should one of your investments suffer
a downturn.
It is important to remember that all investments have a degree
of risk.
Unless you have significant funds to invest (usually in excess
of £750,000) then you would not normally be able to
achieve the required diversification by investing directly
within the asset class.
To overcome this problem you can use funds known as collective
investments. These funds “pool” your money with
other investors and are managed by professional fund managers
on your behalf.
The funds can either be Unit trusts, OEICS, Insurance funds
or Investment trusts. They all perform a similar function
but have different legal structures and taxation issues.
Things to consider when investing;
Ensure you have a sufficient cash reserve/emergency
fund that meets your requirements. (minimum recommendation
is normally at least 3 months expenditure).
The overall objective in investing (i.e increase
income in retirement, university fees)
Minimum term of your investment.
Your risk/reward profile The degree of risk you are
prepared to take with your investment. (i.e. attitude to risk).
Income or growth requirements or a combination of
the two.
The degree to which you wish to get involved in the
management of your investments.
Your views on ethical investing (i.e. do not wish
to invest in tobacco companies).
If it sounds to good to be true, it probably is.
Conclusion
We hope this article has been thought provoking and given
you an insight into your investment options.
As Independent Financial Advisers, Independent Options can
offer you advice that covers the whole market place not just
one provider or a limited panel of providers.
Independent Options has pride in providing top quality advice
and has a Chartered Financial Planner amongst it’s team.
This is the pinnacle of the Chartered Insurance Institute’s
qualification for Financial Planners.
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