Types of Investment

There are so many types of investments that you can make that one article from us simply couldn’t cover the whole range.  But whilst many might be quite speculative a good investment portfolio should probably contain a mix of the following five areas:

Shares

Whether you are investing directly into the stock market (and it is almost impossible for an amateur to beat the market without a huge amount of luck, a good portfolio should contain a broad mix of shares.

The simplest way to do that would be through some kind of mutual fund with the most popular funds being market trackers which invest in perhaps for example the FTSE top 100 companies.  But there are products which go slightly further afield, and you might consider investing in shares in some of the various emerging markets or perhaps a fund that invests that for you.

Much closer to home the alternative investment market (AIM) contains some shares which qualify for tax relief under the enterprise investment scheme (EIS) meaning that any gains will be far more tax efficient. The same applies to smaller companies and most small businesses that get equity from investors (think Dragon’s Den on this one) actually get the money from somebody that they know. The returns can be spectacular, but then so can the losses so be warned.

Bonds

A bond represents a loan from an investor usually to a company (or sometimes a government) which has a fixed amount of income payable on it monthly or annually.

These are good products for someone who requires regular income from an investment which is relatively low risk. There will usually be a date when the “loan” is repayable, and the value of the bond can go up and down in the meantime depending on how the fixed income compares to the sort of rates that investors can earn elsewhere.

Bonds are riskier than bank or building society savings but safer than shares.

Residential Property

Many wealthy individuals have built their wealth by investing in residential property. A big part of a successful portfolio is timing. Some of those who have built up wealth very quickly got into the market when prices were at rock bottom around 1993/94.

The market is much more matured now but there are still bargains to be picked up if you look carefully enough. A residential property can give you an excellent return on an annual basis in terms of the rent that you receive. Leveraging your portfolio by borrowing money to buy the next property can also increase your returns.

But beware. If interest rates increase, then not only will you find that your profits are turning into losses but also you may find that the value of your properties goes down as well.

Commercial Property

This is difficult for the average investor to get into because it requires so much capital in one go.

Lenders will rarely lend more than 70% of the value of a commercial property meaning that a considerable deposit needs to be found. But owners of commercial property will tell you that the yield on their investment is typically higher than residential property and share on the stock market. The biggest risk attached to commercial property is having a period without a tenant because you can still find yourself liable for rates costs and of course interest charges if you have borrowed to purchase the property.

Cash

Every good financial adviser will tell you that having some money in cash is a good part of anybody’s investment strategy.

You should always try and get the best interest rate on that but ensure that your money is not tied up too long. Ultimately, investing in cash will not make you rich though. Interest rates paid on cash deposits are rarely higher than inflation meaning that your capital is being eroded.  Having money in cash not only protects you personally in case your business is in trouble or you lose your job but also enables you to take other opportunities that might become available to those who can move quickly.

Diversification

Of course, the safest way to make your investments is to spread your holdings across several of these areas and perhaps others as well. Some investors include Government Securities, Fixed Interest certificates, Futures, Hedge Funds and use wrappers such as ISA’s, Pensions, Unit trusts or a variety of other collective funds as a way of reducing their risk.

Our sister company A4G Wealth can offer you an unbiased view of the options available to you.