Let’s face it, times are strange. Most of us are stuck in our house for 23+ hours a day, alongside every other member of our family – or worse, alone. And, with little else to do, it’s easy to get sucked into binge-watching Tiger King or Ozark or re-watching all 10 seasons of Friends.
So, a few weeks ago, I signed up for some free online classes to make the most of my downtime and hopefully learn something new. Admittedly, I was a bit enthusiastic choosing three, but I have managed to (sort of) keep up to date with the ‘Introduction to Psychology’ course from Yale University. So I thought I’d have a go at producing my own ‘Introduction to Investing’ five week ‘course’ – although rest assured, there is no additional reading required (unless of course you want to fill your time browsing through the FundCalibre website)!
“Invest in yourself. Your career is the engine of your wealth.” – Paul Clitheroe, financial advisor
I won’t lie, investing is complicated and confusing at times, but that doesn’t mean it has to be hard or impossible. It can also be very rewarding both from an academic and financial point of view — if you’re willing to put the time in.
What is investing? Simply it’s putting your money into stocks, bonds or other assets – instead of cash – with the hope it will grow over time. We usually invest so that we can do things like buy a house and pay our future selves in retirement. This series will focus primarily on investment funds, but for a refresher on the difference between stocks and bonds check out our first ever millennial post.
The difference between an investment fund and investment trust
Investment funds are run by a professional investor – called a fund manager – who will have the techniques and experience to research all the possible things they can invest in and decide which ones they think have the best prospects. They essentially pool together different people’s money into one large pot and then invest it in lots of different things. Everyone gets a number of ‘units’, depending on how much they invest. You can put money in or take money out on a daily basis and there is no limit on the number of units that can be created – a fund is open-ended.
Another type of investment we often discuss is investment trusts. An investment trust is all of the above as well, with one key difference: it is close-ended – only a certain number of shares are issued. This is because an investment trust has a company structure and is listed and traded on the stock exchange like any other firm. You buy shares in a trust and their price is affected not only by the performance of the underlying holdings, but also by investor sentiment towards the investment trust.
Interested in investment trusts? Start with our guide to investment trusts video series.
Why should you invest in funds (or trusts)?
One of the most important advantages of a fund or a trust over an individual investment is diversification. Diversification is something that gets talked about a lot in investing, it’s the ‘don’t put all your eggs in one basket’ mentally. It’s important to have multiple companies yes, but also to diversify across different markets, sectors, even bonds and absolute return funds. Diversification in a fund or trust, and your portfolio, ultimately helps to spread your risk.
A disadvantage of a fund or trust is that you don’t have a say in what a fund manager owns. Funds and trusts also have charges – after all, they’re providing a service and a level of expertise. We’ll take a closer look at fees later on, but it’s important to remember and consider fees when choosing where to invest your money.
Equity, bond, multi-asset, what’s the difference?
Investments can generally be broken into two main categories or asset classes: equities and fixed income. Equities are the shares of a company, while fixed income is its debt. Just like you or I would go to the bank for a loan, sometimes companies and governments need loans too. Said government or company promises to repay the debt at an agreed interest rate and repay the full amount borrowed by a certain date. Some funds and trusts invest just in equities, others in bonds, Some invest in both and other things besides.
Curious about multi-asset, absolute return or even property investments? Read our 2 minute guide to asset classes
Next week we’ll cover a few more fundamentals like active versus passive, fees and the importance of understanding risk before tackling different investment styles like growth and value and investing for income.
P.S. If you’re interested, my free Introduction to Psychology course is 6 weeks long and re-starting 20th April on Class Central