Many of us have little to no experience when it comes to investing; we think that it’s something we probably should do, but we’re not sure of how to go about actually doing it.
The sheer number of savings and investment options on the market doesn’t help matters – in fact, it only serves to confuse us more. It’s actually a very good thing though, as it means that there’s something out there for everyone. All that you need is a little knowledge to help you work out which product is best for you, and that’s exactly why we created this handy little guide…
Why You Should Invest
We all know how to save cash, but investing is a different ball game altogether. In truth, ordinary cash savings are still a very good idea, but it’s best not to hold them in isolation. The reason for this is that inflation can eat away at the capital set aside in savings accounts, particularly when the economy is struggling and interest rates are low. If this sum fails to experience a significant increase as a result, it’s worth will become lower and lower in real terms as the years pass, meaning that you can buy less and less for your carefully saved money.
Trying to avoid this unfortunate scenario is the main reason that people invest. Investing gives your savings the potential to grow at a higher rate than cash over the medium to long term. Although this does not make it impossible for your fund to go down, when it goes up, the increase will be significantly more than it would for cash savings totalling the same amount.
The Four Asset Classes
Four main types of investments, known as ‘asset classes’, exist: cash, bonds, property, and shares. It is impossible to say whether one is better than the other for you – they each have pros and cons, and these will deter or entice people to different degrees depending on their individual personality and circumstances.
Cash is the simplest concept to understand, as this asset class simply refers to the capital deposited in banks and building societies. Cash savings are a very low risk investment in terms of losing money, but these deposits are susceptible to decreasing in real value when interest rates drop.
Bonds are loans made to the government or private companies. They are generally considered to be a reasonably low risk investment, and usually pay a regular income until maturity.
The property asset class simply refers to residential or commercial buildings. Although most people have a better understanding of the concept of property than they do of bonds, investing in the former is actually significantly riskier as values tend to rise and fall in line with the performance of the economy.
Shares are generally considered to be the riskiest of the four main asset classes. The markets that retail them are volatile, and prices frequently rise and fall. However, over the long-term they tend to perform better than any other asset class.
Choosing Your Investments: Risk vs. Return
If you’re set on investing, it’s important to balance risk and return whenever you make a decision. As a general rule, the less risky the investment, the more likely you are to get your money back, but the less potential for growth. This means that although cash savings are much safer than shares, you’re less likely to make a profit on them.
The decision of how much risk you’re willing to run should be influenced by a number of factors, mainly your personality. Some people are happy to risk everything in the hopes of landing a tidy nest egg; others prefer to know exactly how much they’ll have to retire on. The best path for you to tread is entirely in your own hands, so make sure that you choose wisely.