Understanding the Basics
Before you choose to invest in a financial product, it's important to understand how the product or investment will meet your goals. This short guide aims to give you a better understanding of how investment products work in general.
When deciding how to invest your money it makes sense to have a good understanding of how investments work and the factors you should consider before making a decision:
- Why are you investing?
- How long do you want to invest for?
- What is your attitude to risk?
- Wealth Warning
Why are you investing?
We all have financial goals that we want to achieve. For instance some of us will need to save for future expenses such as our children's education or our retirement. Others would like to invest to build up a lump sum to buy a property or holiday home.
You should set out your financial goals, your reasons for investing and how you are going to achieve your financial goals. Consider if you need to achieve long-term capital growth or if you need a regular income in the future from your money.
How long do you want to invest for?
When you are investing, time plays a key role in helping you decide how much risk you are willing to take. Knowing how long you want to invest for also helps you decide on the type of investment that is most appropriate for you.
What is your attitude to risk?
As an investor, you want to achieve the highest possible return at a level of risk that suits you. The key is finding a balance between the amount of risk you are willing to take and the potential returns you want to achieve.
The following information sheets which are available for download illustrate "typical" Asset Mixes/Diversification Strategies for a Cautious, Moderate, and Speculative Risk taker
On a scale of 1-10 where 1 is Low Risk, and 10 is High Risk, these would be ranked 3, 5, and 7 respectively.
The risk to your original investment
Many investments carry a risk of losing money - some more than others. Capital risk means that you could loose some of your original investment. But bear in mind that the general rule with investment is, the greater the risk, the greater the potential rewards.
If you can't afford to risk losing some of your original investment, you may want to consider investing in a capital protected product or a deposit-type account.
The risk to the return on your investment
When you invest, there is a chance that your investment may not grow as much as you thought it would. Therefore your ability to withstand market volatility is important before you decide to invest. Typically the higher the volatility, the greater potential investment returns but also the greater the potential for losses.
The risk of inflation eroding the value of your investment
If the rate of inflation is higher than the return you receive on your investment, the buying power of your original investment will be eroded. Therefore it is important to consider the return on your investment with respect to the rate of inflation when you choose to invest.
Understanding the risk and return associated with investing
In general, you can invest in one or a combination of asset classes:
- Equities
- Property
- Fixed Interest Securities (Bonds)
- Cash
Each asset class has its own risk and return characteristics. The graph shows the likely investment risk and growth prospects that can be expected from each asset class over the long term.
Equities
These are stocks and shares in companies. Historically, equities have produced higher returns than other asset classes, and have the best chance of beating inflation over the long term. However they also carry greater risk. Over the shorter term, the value can go up or down significantly, making them more volatile. This is why equities are normally viewed as a long-term investment, giving you time to ride out the short-term ups and downs.
Property
Historically, property has provided lower returns than equities but higher returns than bonds or cash. Property enjoys relatively low volatility compared to equities. It provides good and reasonably stable returns over the mid to long-term. It also provides good diversification from equities. This is why property is normally viewed as a medium to long-term investment.
Fixed Interest Securities (Bonds)
Governments and companies issue bonds as a type of loan in order to borrow money. In return they promise to repay the loan at a future date with interest. Historically, bonds have produced better returns than cash, but in general have yielded lower returns than property or equities and are considered to be less volatile.
Cash
Investing in cash means putting your money on deposit (for example, in a bank account) where it earns interest. Cash bank deposits offer more security than equities, property or bonds as the basic capital is protected. However returns are likely to be more modest than equity, property or bonds based investments and your investment is at risk of being eroded by inflation over the longer term.
How to get the balance right
By spreading your investment among different asset classes, you can reduce the overall level of risk in your portfolio.
Generally, it's not possible to diversify all risk but spreading your investment over a mix of assets is a good way to help smooth out the ups and downs of an investment.
Wealth Warning
The value of your investment can fall as well as rise, regardless of which investment option you choose. Past performance is not a guide to future performance.
The Euro value of overseas assets can rise and fall as a result of exchange rate fluctuations.
In line with other product providers, charges may be altered in the future.
The returns from investment linked funds are directly linked to the performance of the assets in which the funds are invested.
The asset mix of each fund is continuously reviewed and may be changed in line with developments in relevant markets.
In exceptional circumstances, a request to change funds or surrender benefits may be deferred for up to one month, or one year for the Standard Life Property Fund.
Given that assets within the Individual Investment Solutions can be illiquid in nature, switches can be completed, or benefits can be paid, only when the assets have been sold, Standard Life receives the proceeds and all related expenses have been paid. Some assets take longer to sell than others and therefore the delay in making the switch or paying the benefits could be considerable.