Where to invest?

Whether you go down the do-it-yourself route or decide to delegate investment decisions to the experts, it may be a good idea to make sure that your money is spread across a mix of investments and countries.

Investment categories

Investments are grouped into four main categories, or asset classes. Here you can find out a bit more about each of these asset classes, including the types of potential returns you can expect and also what can affect those returns.

The value of the investments in any asset class can go up or down, and they may be worth less than you paid in - there aren’t any guarantees.

Equities


These are part ownership in a company, and are usually known as stocks or shares.

Potential return

  • Returns come from growth in the value of the shares, plus any income payments issued by the company (known as dividends).
  • Changes in foreign currency exchange rates could significantly affect returns in overseas equities.

Risks

  • Equities are one of the more volatile asset classes, and their value can rise or fall sharply at any time.
  • Because of this equities should normally be viewed as a long term investment.

Bonds


These are essentially loans to a government or company. These loans are often for a set time period and the bond owner usually receives regular interest payments. Bonds issued by the UK government are called 'gilts' and those issued by a company are 'corporate bonds'.

Potential return

  • Returns are the combination of any interest received and any change in the bond’s value.
  • Changes in foreign currency exchange rates could significantly affect returns in overseas bonds.

Risks

  • A bond’s return will be affected if:
    • the interest or capital can’t be paid back in full or on time
    • the creditworthiness of the company or government reduces
    • interest rates or foreign currency exchange rates change
  • As bonds can be traded on the stock market, their value can go up and down at any time.
  • Some bonds are riskier than others, e.g. bonds issued for a longer time period or by companies which are viewed as risky.

Property


This includes direct investments in buildings and land, as well as indirect investments such as shares in property companies (known as property securities).

Potential return

  • Returns from a direct investment in property are a combination of rental income and any change in the property value.
  • Returns on property securities can be similar to those from equities.

Risks

  • The value of direct property is generally based on a valuer’s opinion and is not fact.
  • Property can take a lot longer to sell than other types of investment, so you might not be able to sell when you want to or get the price you were hoping for.
  • Property securities, like equities, can have sharp changes in value at any time.
  • The values of different types of property don’t necessarily move in line with each other. For example, commercial property could be losing value even if house prices are going up.

Money market instruments (including cash)


These include deposits with banks and building societies, as well as governments and large corporations. They also include other investments that can have more risk and return than standard bank deposits. There are circumstances where money market instruments can fall in value.

Potential return

  • The return comes from any interest received and any change in the value of the instrument.

Risks

  • Investments in these assets are riskier than cash deposit accounts - in some circumstances their values will fall.
  • Returns may be lower than inflation.

Specialist and other (including absolute return)


There are other investments that don’t fit into one of the other asset class categories. These include direct and indirect investments in real assets like commodities, for example oil and precious metals.

They also include investments with specialist characteristics, such as absolute return investments. These aim to have a positive return regardless of market conditions. Their investment strategies vary widely, but they often use complex strategies that make use of derivatives. Risk and return will depend on exactly where they invest, but in general absolute return investments can be expected to fall less than the wider markets when markets fall, but also to increase by less than markets when they rise. Although absolute return investments aim for consistent positive returns, there's no guarantee that they'll achieve them

Funds

Investing through a fund means that your money is pooled with other people’s money, giving you the opportunity to put your money into a wider range of assets than if you invested directly. A professional fund manager decides what to buy, based on what the fund is aiming to do.

There are funds which invest in just one asset class or country, and others which invest in a selection of different asset classes and countries, like the MyFolio Managed Funds.

Where to invest diagram

As well as being able to choose funds by what they invest in, you can also choose how your funds are managed:

Passive funds


Passive funds aim, before charges, to track or replicate the performance of an index or indices. They will move up and down in line with the market as a whole rather than being affected by how individual companies are performing.

You may also see passive funds called 'tracker' or 'index-tracking' funds.

Active funds


Active funds aim for above average returns by using fund manager analysis. The fund manager will try to outperform the market by investing in companies that they believe will give higher than average returns.

Returns aren’t guaranteed though, and there is a chance of active funds performing less well than passive funds. Active funds can go up and down in value more than passive investments, although some fund managers use active management to reduce risk in their funds.

Generally the charges for active funds are higher than for passive funds.

Find out more about active and passive investing.


Find out more about diversification