There are many schools of thought on this but it is generally agreed that an investment portfolio (by which is meant any group of investments) should be diversified. In other words they should be spread out amongst the asset classes.
Why? Different asset classes react differently to changing market conditions. If you have your investments spread out amongst different asset classes, it is likely that at any given time, some may be rising while others may be falling. This helps to reduce the investment risk, but it can also act to hold back the overall return. As to how much to diversify and what asset classes to use, this is comes back working out what level of risk the client wishes to take. Different portfolios can be worked out to cater for different tolerances of risk.
All of us are invested in one asset class or many. We may have money on deposit in our savings. That is one asset class. If interest rates go up, it benefits. If they go down, it suffers. We may own residential property. The value of properties can go up or down. Many of us have some sort of pension investments. Often these are with some type of Managed Fund which has an investment manager in charge of working out which asset classes to put your money into, and who is actively trying to increase the value of your investment.
Tuesday 5 October 2010
THE TEMPORARY ANNUITY
Rather than taking out a guaranteed for life annuity now while annuity rates are low, you can choose to take a guaranteed income for a fixed period of time, e.g. 5 years. You then have a guaranteed amount returned to you so you can either repeat the process or buy a lifetime annuity at that point. For some unwilling to take an investment risk, this can be a useful way to guarantee a level of return on your pension fund without investment risk.
MAKING INVESTMENT DECISIONS
You can invest your money in many ways. The different general groupings of investment choices are called asset classes. An asset class is a type of investment, which shares its characteristics with others in the class – both as regards risk and the way they behave in the investment market.
The three main classes of assets are as follows:
Equities – by which we mean investment in companies either directly, e.g. buying shares in British Telecom, or through an investment fund, which invests in a number of companies, e.g. a pension managed fund.
Fixed Income – referring to bonds (essentially loans to a company or the Government – when they are called “gilts”). The company or Government pay an agreed rate of interest on the loan and promise to return the capital at the end of the agreed term.
Cash – usually money in a high interest savings account or ISA, but could also be actual cash you have in a safe or under your mattress.
In terms of risk, Cash is considered the lowest risk, followed by Fixed Income and then Equities.
Equities can be broken down by:
Size – large companies or small companies
Industry – health care, energy, technology, building, etc
Country – any specific country or geographical area, including global funds
Bonds can be broken down by:
Safety – a bond issued by the Government is considered safer than one issued by British Telecom, which in turn is considered safer than one issued by a relative small or new company, since they are more likely to run into trouble and have difficulty repaying their debt.
Term – a short-term bond (i.e. one that will come due in less than 1 year) is not as risky as a longer-term bond (i.e. one due in 20 years time).
Other asset classes would include Property, Foreign Currencies, natural resources, precious metals like gold, collectibles such as art, coins, stamps – or even fine wine.
The three main classes of assets are as follows:
Equities – by which we mean investment in companies either directly, e.g. buying shares in British Telecom, or through an investment fund, which invests in a number of companies, e.g. a pension managed fund.
Fixed Income – referring to bonds (essentially loans to a company or the Government – when they are called “gilts”). The company or Government pay an agreed rate of interest on the loan and promise to return the capital at the end of the agreed term.
Cash – usually money in a high interest savings account or ISA, but could also be actual cash you have in a safe or under your mattress.
In terms of risk, Cash is considered the lowest risk, followed by Fixed Income and then Equities.
Equities can be broken down by:
Size – large companies or small companies
Industry – health care, energy, technology, building, etc
Country – any specific country or geographical area, including global funds
Bonds can be broken down by:
Safety – a bond issued by the Government is considered safer than one issued by British Telecom, which in turn is considered safer than one issued by a relative small or new company, since they are more likely to run into trouble and have difficulty repaying their debt.
Term – a short-term bond (i.e. one that will come due in less than 1 year) is not as risky as a longer-term bond (i.e. one due in 20 years time).
Other asset classes would include Property, Foreign Currencies, natural resources, precious metals like gold, collectibles such as art, coins, stamps – or even fine wine.
ANNUITIES – A LOWER RISK CHOICE
An annuity is basically the swapping of a sum of money in exchange for a guaranteed income for life or for a specified term of years. The Government backs these guarantees in most cases. So if you have £50,000, for example, and do not need the capital but do need to increase your income, you can go out to the market and trade the capital for an income. Once the deal is done you are guaranteed to get your income, so there is no investment risk – in most cases. Annuities are normally only worth considering by those aged 55 and older
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