Monday, 17 September 2012

Types of investment

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.

    The main types of asset

    To help you find your ideal allocation, you should familiarise yourself with the main asset classes:
    • Shares are high-risk investments, but they offer the best long-term returns.
      Find out more about shares
    • Bonds are investments that can provide a steady income.
      More about bond investing
    • 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.
      More on cash.


    If you diversify your portfolio by holding a variety of investments, you can prepare yourself for the ups and downs of the market.

    Different shares and assets perform well at different times. If you diversify your portfolio – that is, buy a variety of investments – you can take advantage of these differences in performance and achieve a more balanced return.
    The advantages of diversification are easy to see when you consider what might happen to a non-diversified portfolio.
    If you hold the shares of just one company and it collapses, you could well lose your entire investment. If you were chasing returns in a particular sector that takes a hit – much like the banking sector in 2008 – you would again find yourself with heavy losses.
    With a diversified portfolio, only a small fraction of your money is tied up in any given area. So a single bankruptcy or industry slump cannot have too large an impact on your total return. Remember that the value of well diversified portfolio can fall as well as rise.

    How to diversify

    You can diversify your investments at a number of different levels:
    • across companies
    • across industries
    • geographically
    • across asset classes.
    If you want to diversify while still keeping your portfolio manageable, you should consider pooled investments. These can include ETFsfunds, or unit trusts/OEICs, all of which invest in a basket of shares, bonds or other assets. 

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