What Are Your Investing Options?
How on earth do you choose an investment from the thousands of products that are available? Skimming through the weekend papers, we are bombarded with impressive-sounding numbers and pretty pictures. Where do you start?
Despite the thousands of products on offer, they can usually be broken down into seven types of asset:
Safe, dependable cash. You know where you are with cash. You get paid interest too — but take off tax and then adjust for inflation and you’re usually left with next to nothing.
Here we talking stuff like stamps, wine, art, classic cars, and so on. If you have specialist knowledge in a certain area, then this could be a route you find appealing. While it’s certainly possible to do well, it’s also very easy for the non-expert to lose money.
Gold, oil, copper, orange juice — there is a market for all these things. Commodities tend to drift in and out fashion, with several years of price gains following by several years of losses, but predicting the turning point of any particular cycle is very, very difficult, so we don’t think commodities are a great option for those starting to invest.
Buying a currency can essentially be thought as a bet on that country’s economy. Predicting economic ups and downs is also very, very difficult, so let’s put currencies in the “too hard” pile for now.
Finally we have a asset that doesn’t begin with ‘C’!
Bonds are essentially loans that can be bought and sold. The most common types are government loans, or gilts (where the government concerned is the UK’s). But you can also trade corporate bonds, which are loans to large companies. The capital value of bonds moves up and down in relation to interest rates, and how reliable and financially secure the company or government concerned is perceived to be.
Over the long term, bonds have returned slightly more than cash, but not by much. That said, as interest rates have been headed south for a few decades now, bonds have done a lot better than that recently.
Many people believe that property is the best investment of all thanks to rising house prices over the last few decades. The value of your house may have leapt over the years, but don’t forget all that money you have paid out to fund the mortgage! In fact, the fact that you generally finance most of a property purchase with a loan is a key element in why property investments have become so popular.
Just how well property as an asset class has done is actually quite hard to calculate however (should you include bills for repairs and maintenance for example). In addition, it can be more awkward to buy and sell than other assets. There are legal costs and estate agent fees, and it’s usually all or nothing (i.e. you can’t buy and sell part of a house).
Of course, most people already have a large chunk of their assets in property, by virtue of owning their own home. So it often makes sense to invest in other assets to diversify your risk (i.e. don’t have all your eggs in one basket).
Shares, or equities, means investing in a company like Vodafone, Unilever or Tesco. You can buy shares in individual companies yourself, or you can buy a fund that invests in a broad range of companies on your behalf.
Shares can be pretty volatile in the short term, and that scares some people, but their record of long-term returns is pretty good, as we shall see in the next article.
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