Diversification

There are a number of different types of investment assets and these perform differently depending on the economic climate and timescales, both in the UK and worldwide.

Proven investment theory is that in order to deliver long-term investment returns while reducing risk, you need to build a portfolio (a collection of investment funds) which includes holdings in a number of different assets. This is known as ‘diversification’.
The number of asset types, and how investments are split between them, will vary from investor to investor and will depend on things such as their views on investment risk and personal aims.

Cash

Cash savings are commonly held in deposit accounts with banks and building societies. They are often used in a portfolio containing a wide range of investments to pay for advice and other costs, without the need to sell investment funds.

Bonds

Government and company loans are an option for investors. Returns typically come in the form of interest payments while the risk depends on the likelihood of the borrower repaying the debt.

Property

Homeowners are familiar with using their money to buy their homes, but in the investment context, it is much more likely to be in commercial property. Investment growth can come from the rise in property values and rent, but of course, neither is guaranteed. A further risk is that in certain circumstances it may not be possible to sell property fund holdings at the time you need the money.

Equities

These are better known as stocks or shares and represent an investment in a company for ownership rights. If the price of a share rises, so does the value of your investment, but if share prices fall the value of the investment will also fall.
The financial performance of the company will affect prices, and so will other factors such as market and economic conditions. As a result, equities carry more risk than cash, bonds and property.

Alternatives

This category of investments can include specialist funds that aim for higher returns through investments that involve a high risk of loss, known as hedge funds, but also covers investment in specific raw materials or commodities such as gold and oil.

 

 

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