A simple guide to investment jargon: part one

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MoneyPlus Features Team

July 09, 2021

6 mins read

Jargon can make things confusing and, when it comes to investments, it can make it harder for you to make the right choices for your future. So we’ve put together a list of common terms and ‘busted’ them for you.

1. Investing... and saving

Investing is putting your money into something like a pension or other financial product, stocks and shares, property or a business, to try and make a profit in the future – although that’s not guaranteed and you could get back less than was paid in. 

Saving is where you put some money aside, usually into a savings account, and you’ll normally get back what you’ve saved, plus interest on top of that. 

You might not think you’re investing, but if you have a pension plan, for example through your employer, or some types of Individual Savings Account (ISA), you probably are. So it’s important to understand the difference. 

2. Pension plan

Put simply, a pension plan lets you, a third party, and your employer if you have a workplace pension plan, put aside money for your retirement. With modern, flexible pensions, your money is invested, giving it a better chance to grow in value than if it was saved into a bank account. However, because a pension plan is invested, its value can go down as well as up and you could get back less than was paid in. On the flip side, savings accounts aren’t exposed to investment risk, so your money is generally more secure in a bank account or cash ISA.

How and where your pension plan is invested will affect how much it may move up and down in value, so it’s important to understand the investment choices you have. If you have a Standard Life pension plan, you can review and manage your investments through online services

You can also get tax benefits on money you contribute to your pension plan, meaning it can be a very effective way to save for retirement.

3. Investment risk

When it comes to investing, risk isn’t always a negative, so this is a useful term to understand. In fact, taking a bit of risk when you invest your money could be crucial to help give it a better chance to grow more than inflation. 

For example, if you take more risk with your investments, there’s the potential for higher long-term returns, although on the flip side, there’s also the potential for greater losses. Investing is normally better suited for long-term goals (five years or more) because that gives you more time to balance out these highs and lows.

There are different levels of risk that can be dependent on your own investment goals, financial circumstances and aspirations for your money. The amount of risk you’re prepared and able to take with your investments might be very different to someone else, and may change as you go through life. We have a questionnaire that can help you find out how you feel about investment risk. 

4. Responsible investing

There are many different ways you can invest responsibly – whether you want to generally avoid companies involved in harmful practices and focus more on responsible companies, or to tap into specific ethical, environmental or social goals. 

As well as the ethical reasons, it can also make financial sense to consider how responsible an investment is.  For instance, how a company treats its employees, local communities, waste disposal and energy use could all indicate future performance – and potential growth for investors. And companies coming up with solutions to sustainable issues may offer opportunities in new markets. This is why investment managers analyse these areas and, using their influence as an investor, often encourage companies to do better. 

If you’re in one of our easy options or your company’s default then it's likely that the experts managing them are already considering responsible investments for you.  You can find out about Standard Life’s approach to responsible investment by checking our online guide

5. Asset classes

Asset classes are categories of investments. The four main ones are equities (also known as stocks and shares), bonds, property and money market investments (including cash). 

It’s generally considered a good idea to have a mix of assets, which is called diversification – more on this below.

6. Diversification

This simply means having a mix of investments – in other words, a diverse range. 

Diversification can help to manage risk and means that the overall value of your investments should be less likely to change dramatically than if you were just invested in one type of investment. It’s a bit like not putting all your eggs in one basket. 

If you’re invested through a workplace pension plan, particularly if you’re in your plan’s default investment option, it’s likely that your investments will already be diversified. 

7. Active and passive

Fund managers usually set a benchmark against which they can assess how a fund is performing or make decisions on what it will invest in. There are different types of benchmarks depending on a fund’s individual objectives, for example it could be a financial market index such as the UK’s FTSE® 100 Index. 

If a fund is actively managed, the fund manager decides which investments to select, in an active attempt to beat the performance of the benchmark. 

In contrast, passive funds (also sometimes called tracker or index-tracking funds) aim to follow the movements of the benchmark (down as well as up) to give comparable returns. 

8. Compounding

Compounding is something Albert Einstein is said to have dubbed the eighth wonder of the world. It basically means the longer you keep your money invested, the more likely it is to grow. This is because each year you have the opportunity to achieve growth, not only on the money you’ve invested, but also on the growth you might have already experienced. 

Let’s say you invest £100, and in the first year you achieve £10 investment growth on that £100. Any further investment growth you get is now added to your original £100, plus the £10 of previous growth. Meaning, if we assume the same growth rate, in the second year your investment might grow by £11, and so on.

If you leave your investments with the aim to grow, this could happen year on year – a ‘snowball’ effect. It might not sound like much, but over time it may build up to be a fair chunk of the final value of your investments. 

We hope that we’ve helped demystify some of the language around investments. You can learn more about pensions and investment basics in our guides or visit Money Helper. Alternatively, you can speak to a financial adviser. If you don’t have an adviser, you can find one at unbiased.co.uk. There’s usually a charge for getting advice. 

The value of investments can go down as well as up and may be worth less than was paid in. Tax and legislation may change. Your personal circumstances and where you live in the UK will also have an impact on your tax treatment. 
The information here is based on our understanding in June 2021 and shouldn’t be taken as financial advice.

 

 

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