Investment asset classes

When thinking about longer term time frames, you may want to consider higher risk alternatives to cash, in the form of investments. Generally, higher risk comes with higher potential returns and losses. Understanding risk tolerance is essential for building a financial plan that aligns with your goals while offering peace of mind. Below we highlight some of the most common asset classes used for savings or investments and some of their benefits and drawbacks.

Investment Types and Associated Risks

Shares:

When you buy a share, you are purchasing a stake in the company and as such the performance of the share is linked to the performance of that company. Because of this, there is a risk associated called concentration risk. This means that if you are only invested in one company and that company were to fail, this then affects all of your investment. To combat this, it is important to consider diversification. You should also think about volatility and how you would personally react to some potentially large swings in the value of your investment.

Property:

Investing in property can seem very attractive because of a concept called gearing. This means that your initial investment is small compared to the amount that it could grow, for example a £15,000 deposit benefits from the growth of the £300,000 property. You do also have to pay off a mortgage in this arrangement, so it is important to keep in mind that there is a chance the value of the property falls below the mortgage amount. Another primary drawback to investments in property is the illiquid nature which means if you need to draw some money you can’t simply sell off a portion of the house and sales can be slow.

Bonds:

A bond is a loan to a company or government when they are looking to raise funds, and they pledge to repay interest annually or semi-annually to you (called a coupon) for a set number of years confirmed at the outset. These are generally seen to be a lower risk investment than shares, however they are not risk free. The main risk associated with bonds is if the issuer finds themselves in severe financial trouble and can not keep up in payments. This has historically never happened with the British government issuing guilts (government bonds).

Your funds can be allocated to cover different needs, from short-term emergency savings to long-term retirement funds. While not universally applicable, segmenting helps determine how much you can safely save versus invest.