This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Many people are interested in investing, but are not fully aware of the range of investment types they could commit their money to. Even experienced investors can benefit from a deeper grasp of how these operate and compliment a portfolio. Below, our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire outlines four common asset classes in the portfolios of UK retail investors. We hope you enjoy this content. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Cash
This is the most familiar and easily understood type of investment (i.e. asset class). Commonly, an investor generates a return from cash by holding it in a savings account – typically with their bank – which then receives interest. Cash is typically seen as “low risk” because the Financial Services Compensation Scheme (FSCS) guarantees your money up to £85,000 in the event of your bank’s failure, and the value of cash does not fluctuate with the stock market. However, the downside is that, at the moment, cash can produce terrible returns in 2021. You are lucky if you can find a savings account offering over 1% interest on your savings, which is still 1% less than the BoE’s (Bank of England’s) 2% inflation target – i.e. which would result in a real-terms loss.
Equities
In the investment world, “equity” usually refers to money which you invest into company shares. You can do this directly by buying X number of stocks in a specific company, or you can pool your money with other investors in an equity fund – which then invests into multiple companies on everyone’s behalf. Equities generate a return in two main ways: dividends and capital gains. The former is a payment from a company to investors – taken as a share of company profits. The latter involves selling your share(s) in a company at a higher price compared to what you originally paid for them. Equities hold the advantage of typically having more potential for growth compared to other asset classes. However, they are more volatile than cash and also fixed-income investments – since the value of a company’s shares can go up/down depending on a range of factors outside of your control (e.g. economic conditions).
Fixed-income
Most investments in this category can be thought of as a kind of loan. When you go to the bank for a loan, they agree to lend you the money upon promise of repayment – with interest – by a certain future date (e.g. 2 years from now). A fixed-income investment works similar to this, but instead you are the lender and a government or company – which is looking to borrow money – is the “bond issuer”. The duration of the bond could be as low as 2 years or as long as 30 years. Regardless, across that time you can expect to receive a regular, fixed-income comprising the principal amount – with interest.
Fixed-income investments can be popular for investors with a lower risk appetite, since regular payments provide more financial stability and certainty about the future. For instance, someone who holds a share in a company may receive a dividend – or not – depending on multiple factors, such as prevailing market conditions and the level of profit generated in a given year. However, those who have lent money to the company must be given priority due to the latter’s obligation to repayment. If the business is liquidated, moreover, then lenders must be compensated first – before shareholders. However, fixed-income investments typically offer a lower level of return to investors, since there is less risk to compensate for compared to equity investments. In certain cases, the interest offered may not beat inflation – resulting in a real term loss.
Property
Many of us intuitively understand how property can be an investment. For homeowners, they usually hope that this will appreciate in value so that, in the distant future, they can sell it for a profit – possibly using the proceeds for a better house, or towards retirement. Yet other forms of property investing also exist. Buy To Let, for instance, offers investors the opportunity to make a return from tenants’ rental yields – whilst possibly also selling the property for a profit later, after the mortgage is repaid. Investors can also invest in property funds by pooling their money into the likes of REITs (real estate investment trusts), which can open up more opportunities to retail investors to make money from the likes of development projects and commercial property.
The downsides to consider for property include low liquidity – e.g. it is difficult to sell a Buy To Let in a hurry – and property market fluctuations, which can be just as volatile as equity markets. There may also be additional commitments which come along with property investments, particularly the need for landlords to manage tenants, maintenance and repairs. This latter commitment can be overcome, however, by investing in the likes of REITs – letting you profit from rental yields and capital appreciation without the need for ongoing “hands-on” work.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
