• The benefits of diversification

    With investing, the old saying ‘don’t put all your eggs in one basket’ rings true. To improve the potential for long-term gains and spread risk, you should diversify your investment across a range of companies, asset classes and geographical regions. This minimises the impact a poor performing economic region or company may have on your overall portfolio.

    When it comes to choosing asset classes there are ‘traditional’ asset classes, cash, equities or shares and bonds. There are also ‘alternative’ asset classes that are now available to private investors which include commercial property and private equity trusts.

    In this section we discuss what these asset classes are and the benefits and risks of each.

  • Equities or shares

    A share (often referred to as equity) is a unit in a company listed on a stock exchange. If a company is worth £100 million and has issued 100 million shares then each share is valued at £1. The overall value of the company fluctuates based on a variety of factors including demand and supply for the goods or service the company is offering, merger and acquisition activity, competitor activity and the economic environment to name a few, all of which can impact the share price.

    Benefits

    Long-term returns - equities have historically delivered better returns over the long-term than other asset classes such as bonds or cash. Despite recent market volatility the case for investing in equities over the long-term still remains strong as short term market downturns have less impact when investing for a period of 10 years or more.

    Inflation proofing - with inflation running higher than interest rates in much of the world, the real value of cash savings is being constantly eroded over time. Given their inherent potential for capital appreciation and the ability to deliver a growing income over the long-term, equities look attractive relative to other assets focused on income.

    Global exposure - your investment in equities is not restricted to companies in the UK. From exposure to companies in one specific region of the world to shares in multinational organisations, now we can all gain access to global potential.

    Income potential - companies can pay income to shareholders in the form of dividends which provides a regular income stream to investors. Companies are not always obliged to pay dividends.

    Risks

    There are a number of factors that can impact the price of shares, some of which are not always within the control of the company and this may have implications for the value of the share price. In some circumstances this may mean that the share price falls below the value an investor paid for it. As we have seen in recent times, economic downturns can significantly impact share prices. By their very nature stock markets fall and rise and if you invest for the long-term your investment has the opportunity to recover from any short term fall. Typically investing in the stock market should be taken as a ten year view so if you need access to your money in the short term, say less than five years then an equity investment is probably not for you.

    Bonds

    A bond or fixed income asset is effectively a loan. A government or company can borrow money by issuing a bond. In return for lending it money the borrower (the government or company) promises to pay a pre-determined rate of interest in addition to paying back the original loan amount when the bond matures.

    Benefits

    Regular income - bonds pay a fixed level of income on a specific date which may make them appealing to those approaching or in retirement or may be seeking a regular income payment.

    Less risk than equities - a company is contractually obliged to pay the coupon or interest on a bond. Therefore if a company runs into financial trouble bond holders rank ahead of equity holders for repayment.

    Diversification - traditionally bonds and equities do not respond to market events in the same way so where equities may be declining in value, bonds may be experiencing strong returns. This is not always the case though, but holding bonds and equities in a portfolio provides diversification and can help to reduce investment risk when compared to investing in a single asset class.

    Risks

    All investment carries some element of risk and if a company defaults on their loan the value of a bond can fall. As bonds are traded on the stock market their value rises and falls and an investor may not receive back the amount they originally invested.

    Changes in interest rates can also cause the value of a bond to rise or fall in value. By investing in different bonds from different companies and sectors such as within an investment trust or mutual fund can help to diversify risk across an investment portfolio.

     

     

    Cash

    Cash is the most familiar form of investment for most people. We use it on an everyday basis and have a bank account which may pay a level of interest on the savings we hold within it.

    Benefits

    The main benefit for most cash investors is safety. Cash is the safest form of investment and the government will protect up to £85,000 held in a bank account should that particular bank run into difficulties or default. Cash accounts make sense for savings that you will need access to within the next few years or as an emergency fund to cover unexpected expenses.

    Risks

    The biggest risk to holding your savings in cash is inflation. Over time the level of inflation erodes the real value of our savings. If inflation is running at around 3% your savings are not earning enough interest to keep pace with the cost of living and therefore you are effectively losing money.

    Property

    Investing in property can be as simple as owning your own home and the increase in property prices at the early part of the century saw a rapid increase in the number of buy-to-let investors in the residential property market. However when it comes to investments typically property investment refers to commercial property. This includes warehouses, offices, industrial estates and shopping centres.

    Benefits

    Return potential - property offers the potential for attractive long-term returns as a result of capital appreciation of the individual properties.

    Diversification - the factors that impact the value of property are different to the factors that affect equities and to a degree bonds. This means that property values will typically be unrelated to shorter-term movements in the stockmarket.

    Income - property can provide an attractive and regular income for investors as a result of rental earned on properties. This is often one of the primary reasons for investing in commercial property.

    Risks

    It is not always easy to sell property quickly and in order to do so property may have to be sold at a price that is lower than the price paid.

    The value of property assets is determined by professional valuers. Such valuations are the opinion of the valuer at a particular time, may not be supported by recent transactions and are liable to revision, up or down.

     

     

    Private Equity

    Private equity involves investing in companies that are not listed on the stock exchange.

    Private equity investors often invest in underperforming companies with a view to turning around their fortunes and making a profit. They also invest in companies looking to expand or increase research and development with the intention of generating greater profits. Many well known companies such as Starbucks, Apple and Google started off with private equity investment.

    Benefits

    Potential for higher returns - by identifying turn around opportunities or companies with the potential for rapid growth and investing in them in their embryonic stages, there is the potential for higher returns than traditional companies listed on the stock exchange.

    Risks

    Due to the fact private equity often invests in start up or young companies or those undergoing restructuring there is the potential that these companies will not survive and therefore it is a much riskier investment than investing in larger established companies.

Past performance is not a guide to future results. The value of investments can go down as well as up.

Information in this section of the Website is directed solely at persons who are located in the UK and can be categorised as retail clients. Nothing on this website is, or is intended to be, an offer, advice, or an invitation, to buy or sell any investments. Please read our full terms and conditions before proceeding further with any investment product referred to on this website. This website is not suitable for everyone, and if you are at all unsure whether an investment product referenced on this website will meet your individual needs, please seek advice before proceeding further with such product.

Top

 

Cookie Policy

We have published a new cookie policy. To learn more about cookies, their benefits and how we use them on our website, please read our cookie policy.

By using the site you are accepting this policy.