One of the main challenges facing a successful investor is predicting how different investments will perform. That’s because the money you get back depends on such a range of different factors, including how stock markets will perform. If you are thinking about investing, then it pays to understand the different types of assets that are available in relation to levels of risk.
More about assets
When securities or investments have similar financial characteristics, we describe them as falling into an ‘asset class’. There are four main types of asset classes:
- Fixed-interest securities (also called bonds)
If you want to manage the risk in your portfolio, you need to mix different types of assets you allocate your money to. This is known as ‘diversification’. In simple terms, you don’t put all of your eggs in one basket!
Low risk or high risk?
Every investor knows that the value of their assets can go down as well as up. Different types of assets present diverse levels of capital risk. Cash has a relatively low risk, whilst investing in shares carries the highest risk. So, if you are risk-averse you need to consider investing the highest proportion of your finance in cash. For instance, you could choose a cash ISA. If you are willing to gamble on high returns, you need to place a comparatively high proportion of your investment into shares. But you also run a higher risk of making a loss.
How do I decide?
If you want to rely on your investments to create a regular income, you might consider sticking with low-risk assets or broadening your portfolio to offset the chance of major loss. Often this is true for older people nearing retirement. However, if you are younger and have money to spare, you might want to take the challenge of incorporating a greater percentage of higher risk assets. Of course, this is a general view, and not individual advice.
Experienced investors often build their own portfolios, but many of us are not quite so confident. Never fear, help is at hand! There are a range of investment funds which offer a ready-mixed allocation of assets. They can offer cautious and more aggressive alternatives depending on your approach to risk. This includes funds which shift their emphasis on risk as retirement approaches. Whatever your age, you are never too old to invest!