Investors today have numerous potential securities and different types of investment options to choose from when crafting their investment portfolios. Not surprisingly, many don’t know where to start or feel intimidated because of all the available financial options. With so many investment options available, you’ll need to identify which ones are right for you and your long-term goals. Your investment needs should help drive these decisions as different asset classes have different characteristics and risk-return profiles.
In this article, we’ll discuss the general traits of some common investment types and options to consider when investing.
Also known as stocks or shares, equities provide partial ownership in a company and usually trade on an open financial market. Investing in equities allows you to potentially earn income through dividends—cash or stock paid to investors—and increase your portfolio value if your equity prices rise. Keep in mind though, that companies can often change their dividend.
Over longer periods of time—think 20 to 30 years—equities generally tend to appreciate and have a relatively high long-term rate of return compared to fixed interest securities.[i] However, this long-term growth potential comes at a cost, as equities often incur higher market volatility than some other assets. Some investors feel uncomfortable with the feelings of uncertainty that market volatility brings, while others feel that they can afford to take investment risk and tolerate the market movements in the hope of greater returns.
Ultimately, whether equities are right for you depends on your personal financial situation and goals. If you need long-term growth from your assets and have a long investment time horizon—how long you need your portfolio to last—equities might be a good option for you.
Also known as bonds or fixed income investments, fixed interest investments are debt securities issued by organisations such as companies or governments to raise capital. Investors purchase these securities in exchange for a redemption amount and a set of periodic payments that are usually provided—called coupon payments—which may be based on a fixed or floating interest rate. Once the fixed interest matures, the issuer normally repays the par amount on maturity to the investor, making these securities similar to loan agreements.
Fixed interest securities generally have lower market volatility than equities. This feature can make them a good option to invest in depending on the investor’s circumstances and objectives. However, some investors only associate risk with volatility, neglecting other potential risks. Fixed interest securities come with different types of risks, such as default risk, which refers to a scenario when the bond issuer defaults and you may not get back all of your principal, or the promised coupon payments. Interest rate risk refers to the potential that interest rates change, which may cause the value of your fixed interest to fluctuate. And depending on the amount of portfolio growth you need to reach your long-term financial goals, fixed interest may not be the best investments.
Pooled-asset investments allow you to buy a portion of a portfolio (or fund) that many investors buy into, which can invest in equities, fixed interest, cash and other securities. Your return is based on the cumulative performance of the portfolio’s underlying holdings and how much you invested into the portfolio, minus internal taxes, and any fees associated with the product and its management.
Two common types of pooled-asset investments are mutual funds and exchange-traded funds (ETFs):
Pooled Investments can be good for investors with smaller portfolios as they provide a cost-effective way to achieve sufficient portfolio diversification. However, simply investing in multiple funds runs the risk of separate fund managers making conflicting trades. For example, one fund manager may buy security X just as another fund manager sells that security, counteracting the trade. With a single fund or a personalised portfolio, you may be able to achieve a more cohesive investment strategy.
Holding cash may seem prudent and safe, and a sufficient emergency cash fund should always be retained to meet unexpected short term expenditures. There may be times when you should hold a significant amount of cash, such as before a home purchase or other important life event. Doing this can reduce the volatility and sharp fluctuations in your portfolio’s value, but putting all your savings into cash within a savings account can also come with risks. If you hold too much cash for too long, you may lose the future purchasing power to inflation. Inflation occurs when the prices of goods and services rise. So even though the value of your money hasn’t fluctuated due to market volatility, it could be effectively losing value over time.
Many investors neglect to account for the effects of inflation when analysing their investment options. Simply put, the cost of inflation means you may need more portfolio growth than holding cash in your savings account can provide to maintain your portfolio’s purchasing power. Failing to consider the potential for inflation risk could take away from your future purchasing power and potentially inhibit you from reaching your long-term investing goals.
Equities, fixed interest, funds and cash are just some of the different types of asset classes, and within each product there may be many different companies or other specifications from which to choose. A trusted adviser should be able to analyse your situation and investing needs and goals to recommend which investments are right for you.
Fisher Investments UK has helped many investors analyse their investment options and determine an asset allocation—mix of equities, fixed interest and other securities—fit for their personal financial situation and goals. Call today to speak with one of our qualified representatives or download one of our educational investing guides to learn more.
i Source: Global Financial Data, Inc.; as of 20/10/2017. Average rate of return from 10/1/1969 through 31/12/2016. Equity return is based on Global Financial Data, Inc.’s World Return Index and is converted to GBP. The World Return Index is based upon GFD calculations of total returns before 1970 and are not official values. GFD used specified weightings to calculate total returns for the World Index through 1969 and official daily data from 1970 on. Fixed Interest return based on Global Financial Data, Inc.’s Global Total Return Government Bond Index in GBP. The GFD Global Total Return Government Bond Index uses 10-year fixed interest securities from the countries of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, South Africa, Spain, Sweden, the United Kingdom and USA. The Total Return Government Bond indices calculated by GFD are used for the index and are weighted by GDP.