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  • Writer's pictureKris | Speed of Light Digital

NAVIGATING INVESTMENT OPTIONS: DEMYSTIFY THE TYPES OF INVESTMENT

Planning for the future can feel overwhelming, especially when it comes to investments. Whether you’re nearing retirement, saving for a dream holiday, or simply seeking to grow your wealth, understanding your options is crucial. This short guide will demystify the investment landscape and help you chart a course towards your financial goals. 


UNDERSTANDING YOUR INVESTMENT OPTIONS MATTERS

Your investment decisions play a significant role in shaping your financial future. Choosing the right mix of assets can maximise your returns while minimising risk. That combination will help you achieve your long-term goals without unnecessary stress. However, navigating the world of investments can feel like venturing into uncharted territory. 



SEEK GUIDANCE, MAKE INFORMED DECISIONS

Some people may choose to navigate the investment landscape solo, but seeking professional advice offers distinct advantages. Having an independent financial adviser alongside you means they can:


  • Act as your investment sherpa: They have the knowledge, tools, and experience to guide you through complex financial products and strategies.

 

  • Tailor a plan to your unique needs: Your risk tolerance, goals, and timeline are as individual as you are. A professional adviser will craft a personalised strategy that reflects your specific situation – a good financial planner will not offer a “one size fits all” investment strategy.


  • Monitor your progress and adapt to change: Markets fluctuate, and so do your needs. A financial adviser actively monitors your portfolio and overall position, adjusting it as your circumstances or market conditions evolve. 


  • Provide peace of mind: Knowing your investments are in capable hands allows you to focus on enjoying life and planning your future, not obsessing over market movements. 


BUILD YOUR INVESTMENT FOUNDATIONS: ASSETS AND RISK MANAGEMENT

Before diving into specific investment options, let’s solidify your understanding of the fundamental building blocks – asset classes and risk management.


Asset classes are categories of investments that have similar characteristics and behave in a similar way in the financial markets. Each asset class represents a different type of financial instrument or investment opportunity. The main asset classes typically include:


  • Equities (shares/stocks): Equities represent ownership stakes in publicly traded companies. When you buy shares you become a shareholder in the company, and your investment returns are based on the company’s profitability and changes to the share price. They offer the potential for high returns but also carry risk of losing money due to fluctuations in the market value of shares. Equity funds, which pool money from many investors to buy a portfolio of shares, can offer a convenient and cost-effective way to buy into this asset class.


  • Fixed income (bonds): Bonds are a type of debt security (loan) issued by governments, corporations, etc. to raise money. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments (known as a coupon) and the return of the money originally loaned. This steady stream of income and return of money invested means that bonds are generally considered less risk than equities. They’re suitable for investors who seek an income and capital preservation. Like equity funds, bond portfolios can allow you to invest in a collection of bonds and spread your risk within this asset class. 


  • Cash and cash equivalents: Cash needs no introduction, but cash equivalents are short-term highly liquid investments that mature in three months or less. They can include financial instruments such as government Gilts, US Treasury bills, money market funds, etc. Cash equivalents are generally stable, low risk, and immediately available to use. That makes them suitable for investors who want to preserve their capital and maintain liquidity. Cash and cash equivalents offer lower returns than other asset classes. 


  • Real estate: Investing in physical properties can offer a combination of rental income and potential for value appreciation. This can be achieved by purchasing properties or real estate investment trusts (REITs) that own and manage income generating properties through pooled investment funds. Owning property normally requires significant amounts of capital upfront and the investment isn’t liquid (you usually can’t sell a few bricks at a time). Managing properties can also be time consuming and expensive. Investing in property using REITs can reduce and spread some of that risk. Some investors like real estate because it is a tangible asset that usually protects against inflation.


  • Commodities: Physical goods like gold, silver, oil, agricultural products, and metals can provide exposure to global supply and demand. That dynamic may help to combat inflation and currency fluctuations. Investment in these commodities can be made by physically owning the goods, or through sophisticated financial instruments. This type of investment can be complex and therefore higher risk than others. 


  • Alternative assets: Investments that don’t fit neatly into the main asset classes encompass a broad range of non-traditional assets. These can include infrastructure, hedge funds, private equity, venture capital, and derivatives. They can offer the potential for high investment returns but often come with higher fees, illiquidity, and complexity compared to more traditional assets. Alternatives should be considered high risk and often require specialised knowledge and minimum levels of investment to use. 


UNDERSTANDING YOUR TOLERANCE FOR RISK

The amount of risk that you are wiling and able to take with your money is personal. People often focus on investment “volatility,” but risk refers to more than that. It’s the potential for you to lose money when investing and/or the amount of uncertainty around achieving your financial objectives. 


Risk is a fundamental part of investing because it ultimately determines the level of returns you can expect. There is an inherent relationship between risk and reward. The more risk you take, the more of a reward you should expect (and vice versa). At the same time, the price of taking risk is a greater chance of losing. 


Assessing your risk tolerance lies at the heart of any investment decision. Your portfolio needs to be targeted at specific financial goals while taking a level of risk that you’re comfortable with. To assess your appetite for risk, consider factors like your:


  • Age.

  • Financial situation – including how much you can afford to lose.

  • How long you are investing for.

  • Whether you’ll need access to the money at any point. 


For example, younger investors who are trying to grow their portfolio over the long term may be happy to own high risk investments and ride out market fluctuations because they know the money isn’t needed for a long time. Conversely, older investors who need to draw from the portfolio (ie. for pension income) may not be able to tolerate large drops in the value of their pot. 


THE POWER OF DIVERSIFICATION

The old adage “never put all your eggs in one basket” speaks to investors. 


It can be tempting to pile in when your favourite company starts getting double-digit returns each year. The problem with that is if your “top pick” stock ever fails, your entire portfolio could go with it. It’s not unheard of, so never think it wouldn’t happen to you. Huge companies can fail. 


Remember RBS or Northern Rock? Or Enron (which peaked at a market value of $70 billion) in the USA? Even much-loved high-street retailers like Woolworths or Toy-R-Us can disappear overnight. 


Spreading your investment across different assets and asset classes helps to mitigate investment risk by avoiding putting all your eggs in one basket. 


The art of “diversification” boils down to investing in a variety of assets that react differently to market events (like rising interest rates, or issue with oil supplies) to lower the overall risk of your portfolio. 


Diversification is not a “set it and forget it” strategy. Over time, changes in the value of your investments will impact the “weightings” of the assets (ie. how much is held in each asset class etc.). Periodically rebalancing the portfolio involves buying or selling investments to keep the right mix of assets (known as asset allocation). Doing that ensures your investment portfolio stays aligned with your risk tolerance and financial goals. 


YOUR INVESTMENT TOOLBOX: EXPLORING POPULAR OPTIONS

Now that you have a firmer grasp of some key investment principles, let’s explore some popular options within the investment “funds” category. 


Usually known as mutual funds or collective investments, funds are a type of investment vehicle that pools money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities. They are managed by a professional fund manager or team of professionals. When you invest in a fund, you essentially buy shares or “units” of the fund, and the value of your investment depends on the performance of the underlying assets held by the fund. 


We’ll focus on equity funds and bond portfolios.


EQUITY FUNDS:

  • Managed fund: These are actively managed by professional portfolio managers (sometimes a team of them). The managers conduct research, analysis, and decide what to invest in with the aim of outperforming the market or achieving specific investment objectives. They may buy and sell securities based on their analysis and market outlook. The performance of managed funds depends on the skill and expertise of the portfolio manager. As they typically aim to outperform the market (or a specified “benchmark”), not all managed funds succeed in their objective. 


  • Index fund: The portfolio managers running an index fund take a passive approach to choosing what to invest in. That means they aim to replicate the performance of a specific market index, such as the S&P 500 or FTSE 100 rather than trying to beat the markets. Instead of relying on an investment manager’s research and analysis of various assets, the portfolio manager will try to mirror the composition and portfolio of the chosen index. This involves buying the same stocks in the same proportion as the index. For example, if a company makes up 2% of the FTSE 100 a fund that tracks the index will have 2% of its holdings in that stock. As the managers are focused on matching an index, the cost of these funds is generally lower than a managed fund. 


  • Exchange-traded funds (ETF): This type of fund is traded on stock exchanges, like individual company shares. ETFs are designed to track the performance of a specific index, commodity, bond, or a basket of assets. They offer more liquidity than other types of fund because they can be bought/sold throughout the day (when the stock exchange is open). That can give investors more flexibility than mutual funds which are usually traded at the end of the day. As passive-type investments, ETFs are also generally cheaper than managed funds.


BOND FUNDS:

  • Investment-grade bond fund: To be considered “investment grade” bonds must be issued by companies or governments with credit ratings of BBB- or higher (ratings by Standard & Poor’s or Fitch) or Baa3 or higher (Moody’s). The portfolio managers will be restricted to only investing in these bonds because the issuer is seen to be more creditworthy and of lower risk to the investor. Within this category, funds may target a niche such as government or corporate bonds only.


  • High-yield bond fund: These pool investments in bonds that are not seen as investment grade. That means the issuer has a lower credit rating and therefore carries a higher chance of defaulting on the debt. High-yield bonds are some referred to as “junk” bonds. 


  • Emerging market bond fund: These invest in bonds issued by governments or corporations in emerging economies. They offer higher yields than investment grade funds from developed countries because they come with greater risk (including currency risk, political risk, and economic instability). 


  • Short-term and long-term bond funds: Investors who are looking for a certain type of income may purchase a fund that targets either short-term or long-term bonds. If a bond matures in less than five years, it’s usually considered short-term and will offer less interest rate risk than one that matures further into the future. The lower level of risk means the return will generally be low. Long-term bonds, on the other hand, typically have maturities ranging from 10 to 30 years. They therefore come with greater interest rate risk but may yield more than a short-term bond. 


  • Multi-sector bond fund: As the name suggests, multi-sector funds diversify their holdings across different bond sectors (like the ones mentioned above). 




DO IT YOURSELF OR ENGAGE WITH THE PROS? CHOOSING HOW TO INVEST

Ultimately, the decision whether to invest DIY or not is yours. Before setting out on your investment journey, consider the advantages of having a professional on your side:


  • Expertise: You wouldn’t manage your health without a doctor, so why handle your investments alone? Having a professional independent financial adviser means you can benefit from their knowledge and experience. That helps you to navigate the ever-changing financial landscape and makes sure you invest in suitable products and services. A Blackmount Private Wealth financial adviser will also go beyond the basic investment decisions and provide you with a robust strategy that accounts for your wider situation and needs. Getting your investments into the right tax structure can impact your outcomes as much as picking the right funds. Then we can construct (and rebalance as necessary) a well-diversified, tailored portfolio of investments that match your risk tolerance and enable you to achieve your life goals. 


  • Save time: Researching and implementing the right strategy, investment fund, and financial products and matching them to your long-term needs and risk tolerance is tricky. It takes time and diligence. Managing your investments once set up can also be consuming. Having a professional adviser frees your time to focus on other priorities in life. Time is clearly one of your most valuable resources and, by securing the services of Blackmount Private Wealth, you can devote more time to the things that you actually enjoy. 


  • Behaviours: Making investment decisions based on emotions can lead to bad outcomes. Your adviser brings objectivity to the equation and helps to guide your decisions according to your personal goals. Research by Vanguard in 2023 suggested that three times as many investors reported having peace of mind because of their adviser. The financial advice process allows you to feel at ease and promotes confidence in the outlook for your financial future. 


You need to make informed decisions and carefully plan before investing for your future. Navigating the options independently is possible, but there are benefits to working with a qualified independent financial adviser. Our expertise, objectivity, and personalised advice can help you achieve your goals with greater confidence and peace of mind. The most important step is to act now and start planning for your future. 


REMEMBER

The value of investments can go down as well as up and you may not get back the full amount invested. The past is not a guide to future performance. Past performance may not be repeated. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. 


It is important to take professional advice before making any decision relating to your personal finances. Information in this blog is based on our current understanding of taxation and can be subject to change. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask us for details. We cannot assume legal liability for any errors or omissions this blog may contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. 


The information contained within this blog is for information only purposes and does not constitute financial advice. The purpose of this blog is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice. 


The Financial Conduct Authority does not regulate some forms of tax advice.

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