Before you choose to invest in a financial product, it's important to understand how the product or investment will meet your goals. This short guide aims to give you a better understanding of how investment products work in general.
We strongly recommend that you seek independent financial advice before buying an investment product. Your financial adviser will know the main facts about these products and will help you choose a product that best suits your needs.
When deciding how to invest your money it makes sense to have a good understanding of how investments work and the factors you should consider before making a decision:
We all have financial goals that we want to achieve. For instance some of us will need to save for future expenses such as our children's education or our retirement. Others would like to invest to build up a lump sum to buy a property or holiday home.
Together with your financial adviser, you should set out your financial goals, your reasons for investing and how you are going to achieve your financial goals. Consider if you need to achieve long-term capital growth or if you need a regular income in the future from your money. You may also need to think about starting to invest for your retirement.
When you are investing, time plays a key role in helping you decide how much risk you are willing to take. Knowing how long you want to invest for also helps you decide on the type of investment that is most appropriate for you. We recommend that you should think of investing as a decision taken for a minimum of 5 years.
As an investor, you want to achieve the highest possible return at a level of risk that suits you. The key is finding a balance between the amount of risk you are willing to take and the potential returns you want to achieve.
There are different types of risk involved in investing as outlined below.
Many investments carry a risk of losing money - some more than others. Capital risk means that you could loose some of your original investment. But bear in mind that the general rule with investment is, the greater the risk, the greater the potential rewards.
If you can't afford to risk losing some of your original investment, you may want to consider investing in a capital protected product or a deposit-type account.
When you invest, there is a chance that your investment may not grow as much as you thought it would. Therefore your ability to withstand market volatility is important before you decide to invest. Typically the higher the volatility, the greater potential investment returns but also the greater the potential for losses.
If the rate of inflation is higher than the return you receive on your investment, the buying power of your original investment will be eroded. Therefore it is important to consider the return on your investment with respect to the rate of inflation when you choose to invest.
In general, you can invest in one or a combination of asset classes:
Each asset class has its own risk and return characteristics. The graph shows the likely investment risk and growth prospects that can be expected from each asset class over the long term.
These are stocks and shares in companies. Historically, equities have produced higher returns than other asset classes, and have the best chance of beating inflation over the long term. However they also carry greater risk. Over the shorter term, the value can go up or down significantly, making them more volatile. This is why equities are normally viewed as a long-term investment, giving you time to ride out the short-term ups and downs.
Historically, property has provided lower returns than equities but higher returns than bonds or cash. Property enjoys relatively low volatility compared to equities. It provides good and reasonably stable returns over the mid to long-term. It also provides good diversification from equities. This is why property is normally viewed as a medium to long-term investment.
Governments and companies issue bonds as a type of loan in order to borrow money. In return they promise to repay the loan at a future date with interest. Historically, bonds have produced better returns than cash, but in general have yielded lower returns than property or equities and are considered to be less volatile.
Investing in cash means putting your money on deposit (for example, in a bank account) where it earns interest. Cash bank deposits offer more security than equities, property or bonds as the basic capital is protected. However returns are likely to be more modest than equity, property or bonds based investments and your investment is at risk of being eroded by inflation over the longer term.
By spreading your investment among different asset classes, you can reduce the overall level of risk in your portfolio.
Generally, it's not possible to diversify all risk but spreading your investment over a mix of assets is a good way to help smooth out the ups and downs of an investment.
There are many different types of investment products available to you from a number of different providers, such as banks and life assurance companies.
You can access most assets directly or by investing in an investment fund. For instance if you would like to invest in equities, you can buy stocks and shares directly through a stockbroker. Alternatively you can invest in a 'pooled' investment fund. This means that your money is 'pooled' with other investor's money to buy units in a fund managed by an investment manager, so you are not responsible for buying stocks and shares directly. The value of your investment fund is normally directly linked to the performance of the assets the fund invests in.
Similarly if you want to invest in property you could buy property directly, (residential or commercial), or alternatively you can buy through your pension fund, or simply invest in a property fund that invests in many different properties.
Click on the following to learn more about Standard Life's range of investment funds and products.
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