Investment Options: A Short Guide for 2024
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
The world of investing can be confusing, not only for beginners but also for seasoned investors. Different “asset types” and investment options often come laden with a lot of jargon, making them difficult to understand. People hear words like “equities”, “bonds” and “money markets” and feel overwhelmed.
The good news is that you do not need to be an investment “expert” to have a good grasp of different investment options. In this guide, our Grantham financial planners explain (in simple terms) some of the main types to be aware of in 2024, how they broadly work and where they can fit into a wider investment strategy.
We hope these insights are useful. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
01476 855 585
info@casfin.co.uk
Cash-based investments
This is the most intuitive of asset classes. The obvious example is putting money into a savings account and receiving interest. Your bank then lends your money (and that of other depositors) to other people, charging a higher rate of interest to generate a profit.
However, cash-based investments are not limited to this. For instance, “money market funds” (MMFs) allow investors to pool their money together, which is then loaned to highly-rated borrowers on a short-term basis.
MMFs may provide a higher rate of return to fixed-rate savings accounts. Yet they come with a slightly higher risk. Savings held with your bank are typically covered by the Financial Services Compensation Scheme (FSCS) up to £85,000. However, MMFs are not backed by the FSCS and may be subject to interest rate risk, liquidity risk and credit risk.
Fixed-income securities
More commonly known as bonds in the UK, fixed-income securities are a type of investment which pays a regular income to investors. Think of this a bit like a bank loan, except you (the investor) are the lender. The “borrower” is a government or company which offers to pay you back – regularly with interest – over a set time by an agreed “maturity date”.
For instance, UK government bonds (“gilts”) pay coupons to investors every six months. Many investors like them due to the predictability of future payments. There is also a perception of low risk since the UK government has never defaulted on a debt payment.
However, bonds have drawbacks. They can be vulnerable to interest rate risk. If interest rates rise in the future and you want to sell your 2% bond, will other investors want to buy it if newly issued bonds in the market are going at 4%?
Equities
An equity investment typically refers to buying one or more shares in a company on a stock exchange. Over time, you (the investor) hope to receive a portion of the profits over time (known as dividends) and/or a profit when you eventually sell your share(s) for a higher price than you originally paid – generating a capital gain.
Buying individual company shares can have a high barrier to entry for many private investors. Berkshire Hathaway Class A, for instance, had a stock price of $406.40 on 27 March 2024. However, equity “funds” can lower this barrier by allowing investors to pool their money and invest in multiple companies at once.
These funds come in many forms. Two common categories to know about are “active” and “passive” funds. The former employ a professional fund manager and research team to analyse different companies, identify market trends and choose investments for the fund which they believe will perform well. The latter simply follow a market “index”, like the FTSE 100, trying to replicate its performance.
Final thoughts
There are, of course, many other investment options than the three types mentioned above. For instance, there is private equity (e.g. startups) and property-based investments, such as real estate investment trusts (REITs). However, most private investors will concentrate their portfolios on a mixture of these three investment options – cash, bonds and equities.
The precise appropriate balance for you depends on many factors. These include your goals, financial situation, risk attitude/tolerance and your “investment horizon”. These should be discussed with a financial adviser to ensure that a tailored portfolio is built, reflecting your unique objectives, values and circumstances.
Over time, your portfolio should be monitored and adjusted using professional guidance. This helps to ensure that your investments stay aligned with your chosen long-term strategy.
For example, if you originally chose a 50:50 split of bonds to equities, your financial adviser can guide you on how to re-establish this balance if varying investment performance has caused this ratio to run off course.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
