214. Why infrastructure is crucial in the transition to net zero
Rebecca Myatt, a portfolio manager on the Elite Rated First Sentier Global Listed Infrastructure...
Once you are comfortable you know what investing is, you’ve thought about your personal goals, and decided how much you can invest, it’s time to make that investment! But which one should you pick?
Deciding where to invest your money is a notoriously difficult task. The first issue to tackle is which asset you prefer.
There are four main asset classes – equities (shares); bonds; property, and cash – as well as other asset classes, such as commodities.
Equities are shares in companies. The aim is to earn a return from capital growth, income, or a mixture of the two. If the company does well you will benefit from the share price rising.
Bonds are a way of earning returns by loaning money to governments or corporations. The bondholder receives a fixed rate of interest for an agreed period, as well as the face value of their original investment returned on a specified future date.
Property investments could be funds that buy actual bricks & mortar buildings or the shares in property companies. The former are leased to individuals or businesses to provide an income and, hopefully, longer-term capital growth.
Cash, meanwhile, will be money deposited with institutions in return for an agreed rate of interest. This is the least risky option, but also the one that usually provides less returns.
Investors often hold a variety of assets in their overall portfolio in the hope that losses suffered by some investments will be balanced out by gains elsewhere. This is known as diversification.
It’s worth noting a portfolio of assets that aren’t correlated to each other, such as commodities and property, can give investors smoother returns over the market cycle.
You will also need to look at where in the world you want exposure. For example, do you want to have most of your holdings in companies listed on the London Stock Exchange? Many investors feel more comfortable with funds investing in household name companies with whose products they are familiar, such as oil giant BP.
However, it’s worth noting that the businesses of such companies may be very internationally-focused these days, with operations based around the world. This means that even though a company is listed on the UK stock market, its income and fortunes could be inextricably linked with other parts of the world.
Other investors prefer to have exposure to other global markets, such as the US, Europe, or emerging markets. It’s down to wherever you feel most comfortable.
As well as funds that focus on particular regions, there are also country specific portfolios that give you more focused exposure.
If you can’t decide on the asset or the region, you could consider multi-asset funds. As the name suggests, these funds invest in a wide variety of assets and areas. A professional manager also changes the mix depending on the prevailing environment. In other words, someone else can make the decisions for you.
Another question you’ll face is deciding if you’re investing for growth or income? Which approach is most suitable will depend on your aims and objectives.
Growth funds generally aim to increase the value of your investment over time, while income funds focus on delivering a steady stream of income.
The idea behind growth investing is straightforward. Fund managers buy into a company whose profits and share price are likely to out-perform the stock market.
There are different approaches for income-seeking investors. Equity income funds, for example, will generally buy into profitable companies that pay regular dividends.
Income investors can also be drawn to fixed income investments. For example, investing in bond funds is seen as a lower-risk approach than shares.
Investment Trusts are another popular investment with income seekers. They have the ability to hold back some of the income they receive to boost dividends during tougher periods.
A key rule is not to invest anything you can’t afford to lose. Of course, no-one wants to lose money but there’s a difference when it comes to risking spare cash.
There are two elements to consider: How much you can actually afford to potentially lose and your attitude towards stock market turbulence.
There are different ways to classify risk. Lower risk investors are usually more cautious and have more assets in safer asset classes such as bonds and less in equities.
Higher risk investors, meanwhile, are at the other end of the scale. They’re likely to have more of their assets in more volatile areas, such as emerging markets, in the hope of better returns.
As the name suggests, medium risk investors prefer to strike a balance between the two. While wary of taking on too much risk, they accept some is needed to earn a decent return.
You can start researching different funds here.