As you get older you may consider making sure investments to ensure a steady income, or a nice lump sum once you’ve retired. Today’s post will talk about investments; explaining the four main investment assets types are and the level of risk that you may need to take.
Although this post focuses on investments, you can also read our generic in-depth guide to finances for older people.
Ranking the Risk
When it comes to investing, risk is ranked on the possibility of losing some or all the money that you’ve invested. If the risk is high, the outcome of your investment is uncertain. At the other end of the scale, if the investment is safe (and the risk is low) then you’re certain of getting back the original amount.
In some cases, people are often prepared to take a higher risk as, in general, higher risk investments have a greater potential for gain. Lower risk investments tend to give a lower return. The type of investment asset you choose will depend on the type of person you are. Some people are naturally cautious and the idea of losing their money is just too great a risk to take. Likewise, other people enjoy the game and like putting their money on the line to increase their profit.
Your thoughts towards the level of risk will also depend on your age and personal circumstances. As Uswitch rightly say: “A parent with three children to support is likely to have a different risk profile to someone who is single and has no dependents.”
Let’s look at the most common investment assets.
The cash asset is often classed as the lowest risk investment as you won’t lose any actual money here. Examples of a cash asset would be putting your money in to a bank or building society account. You could take up one of the following options with your cash investments:
Money Market Fund
These are collective investment schemes, which invest your money in cash or equivalents to cash such as short-term loans to the government (treasury bills). These bills pay a fixed rate of interest. Managers of these funds investment in many different types of cash-like products, and you can therefore diversify your portfolio away from having all of your money tied up in just one savings account or cash Isa.
The danger of these funds is that you can lose some of the capital value of your money. Alongside this, you’re also charged an annual management fee of around 0.75%, which can reduce any returns that your fund makes.
According to Which, during the 2018/19 tax year, you can place up to £20,000 into a cash Isa and then top up your Isa account annually. Any gains you make from the interest you’re paid are tax-free.
If you’re wanting to move your Isa to a higher-interest product, you should transfer it rather than taking it out and re-investing. Doing the latter means that you’ll be using up all or part of your tax-free allowance for that year.
There are plenty of savings accounts that you may choose to place your money in to. It’s important that you look closely at the interest and features on offer in each, so that you get the best deal and service.
Banks generally offer higher rates of interest to new account holders, which generally last up to a year. After this point they may be reduced to a lower rate. Instant or easy-access accounts suit those who may need to withdraw money at short notice.
National Savings & Investments
This is a government-backed savings and investments service, designed to help you save money. As it’s run by the government, 100% of your savings will be protected. Using this service, you’ll have access to products such as simple cash accounts, savings accounts and the inflation-linked savings certificates.
Bonds are created by companies (corporate) and the government (gilts) as a form of debt, in order to raise money. If you choose to put your money into a bond, you are effectively lending money to the issuer.
In return for investments, the issuer will promise to back the money at a set rate of interest each year. They will also agree to repay your capital at a set date in the future. This is known as the redemption date.
Commonly, bonds are issued at £100 each. You can also buy bonds on the second-hand market, however the price you pay will be governed by the rule of supply and demand and prevailing interest rates. If you purchase for more than £100 and hold onto the bond until maturity, you will receive less than you invested. The market price of the bond is linked to interest rates, so a lower price will reflect a lower rate of interest.
Investing into a bond isn’t as risky as putting your money into property of equities. Gilts are often thought of as being risk-free as they are pretty much as good as guaranteed. The risk of a corporate bond will depend on the profile of the company you’re investing in. Issuers with a lower credit rating are considered riskier and they will typically offer a higher rate of interest to attract investors.
Should the company collapse, bond holders will be paid before shareholders – if the funds are still available. Therefore, the return from bonds cannot be guaranteed.
Property investments can be split into two main categories; direct property investments and indirect property investments. Direct property investment can be split further into:
- But-to-Let – Purchasing a property with a view to letting it out. This would provide you with an income, from the rent payments, and capital growth if you sell the property on for a profit.
- Property Development – Purchasing a property directly with the view to renovating and selling on for a profit.
Indirect property investments see you investing through a property fund. If this fund performs well it will provide you with an income in the form of dividends, or rental income, depending on the type of fund, and capital growth when you choose to sell.
Investing into a fund like this means that you’ll have exposure to the property without the need for any work on your part – the fund will be managed by the fund manager. If you go direct, you’ll have on-going involvement with letting agents and tenants, as well as managing property development jobs. Buying a property is a hands-on investment.
With a direct property investment, you won’t need funds to cover 100% of the property in order to purchase, as you can borrow any remaining balance through a mortgage. Despite this, if the value of the property increases, you’ll still benefit from this. Uswitch explain further:
If, for example, you have £25,000 to invest, you could choose to buy shares, or alternatively you could use the money as a deposit to purchase a £100,000 house. If shares go up by 10%, you stand to make £2,500, 10% of your original investment. However, if your property goes up by 10% you stand to make £10,000 – 10% of the total property value, but a 40% return on your investment.”
Remember that there are other costs to consider when purchasing a property, and that the value of said property can also go down.
Stocks and Shares
A share represents a share of ownership in a company. These shares are listed on a stock exchange and purchased from investors. When you buy a share, you are buying a small stake in that company, and therefore become a joint-owner alongside all of the other shareholders.
The aim here is for shares to grow in value over time, and to also benefit from your share through regular dividend payments. Shares give investors the opportunity for a steady income and capital growth, although neither of these is guaranteed.
Of course, the risk of investing in shares is that the prices can fluctuate suddenly. This makes shares higher-risk than other investments such as bonds, cash and property. This is also why they’re more suitable as long-term investments.
As with bonds, the level of risk will depend on the company that you wish to invest in. A small start-up with an innovative product will be a higher risk than a massive, well-known company. However, the small start-up may offer the potential for higher returns.
Before investing in a company it’s important that you do your research and clarify your own goals and risk profile for you commit. The value of shares may increase as company profits increase, or as a result of market expectation, but the opposite is also true. If a company folds, you may lose all of your original investment.
You can find shares to buy directly from a stockbroker or trader, or you can buy shares through an investment fund. An investment fund pools your money with other investors and it also invests in shares in the stock of many companies.
Managing the Investment Risk
The best way to manage all of your investments is by putting your money in a variety of places. This way, if one investment loses money, it will be balanced out by your money in others. Having a portfolio of products, or diversifying, helps to spread risk.
If you put all your money in one place and it goes wrong, you’re highly-likely to lose all of your money in one go.
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