Balanced – the all-in-one investment
1 September 2007
In life, with so many demands on your time, it’s not easy to get the balance right - between work and home, health and wealth, family and friends.
When it comes to investing too, it makes sense to take a balanced approach.
Let’s start with your bank balance. It may be a safe place to put your money, but it’s not always the best place to leave it over the long term.
Simply leaving your money in the bank for 20 years will significantly diminish the value of your savings, due to inflation. For more on this, read our feature The future value of money.
In the long term, investments such as shares, often referred to as ‘equities’, have the potential to do much better than cash in the bank. But equally, in the short term, the stock market can prove extremely volatile.
The fact is that nobody can predict when stock markets will rise or fall, or which asset class is going to outperform the others at any one time. So for most of us, maintaining a balance of assets is a smart move.
Four asset classes
When people talk about investing they usually mean buying shares on the stock market, either directly or as part of a fund. But shares are only one type of asset.
There are four key asset classes and each have a different role to play. Shares, though risky short term, are still widely believed to be the engine for long term growth. Fixed interest securities, better known as government or corporate bonds, tend to be selected to provide a steady return, which can either be reinvested for growth or taken as income. Investing in property provides a real, tangible asset that can add stability to the mix. While cash tends to be used as a short term ‘float’, enabling investors to move quickly on investment decisions.
Three decision points
There are three things you need to think about which will determine the balance of assets you choose and the type of investment that is right for you.
Investment objective
Are you looking for capital growth or income? Or perhaps a combination of both?
Attitude to risk
Are you prepared for the ups and downs of the stock market for all of your investment money or would you prefer to reduce your risks by investing in more stable asset classes?
Investment timeframe
Can you keep your money invested for five years or more? Or will you need to gain access to your capital before then?
Investment and tax
One final consideration. Different types of investment are taxed differently.
Savings accounts and fixed interest securities produce interest which count as part of your income, as does rent from property, and is therefore subject to Income Tax.
Capital appreciation on property, unless it is your principal residence, attracts Capital Gains Tax, as do dividends or profits on the sale of shares.
There is currently a Capital Gains allowance of £9,600 (2008/09) a year so you will need to manage your investment portfolio carefully for maximum tax efficiency. Speak to your financial adviser for further information.
Investment bonds
An investment bond is one way to create a balanced portfolio in one investment within one investment wrapper.
You can choose a balance of assets across a range of funds, or a balance of investments within one asset class. You can invest in different markets and even different sectors. All within the framework of a bond.
And the one thing investment bonds have in common? They provide a flexible framework for long term investment.
Cash
Cash covers not just bank deposit accounts but also treasury bills and other sophisticated cash based products that are traded daily on the money markets. As well as having money put aside for a rainy day, an element of cash in a portfolio can also act as a ‘float’, some ready cash that gives you the opportunity to move quickly on investment decisions, whilst still providing some protection against market downturns.
Fixed interest securities
Sometimes called gilts or corporate bonds, fixed interest securities are loans to governments or companies. Individual bonds usually offer a fixed rate of interest over a fixed period. Because individual bonds are traded regularly, the rate of return you receive from your portfolio may vary over time. Nonetheless, bonds are perceived to be less volatile than shares. The value of fixed interest securities tends to rise when interest rates fall and vice versa.
UK commercial property
Commercial property includes shops, office blocks, warehouses and industrial units. A tangible asset like property almost always has some residual value. The value of your investment has the potential to rise in line with the market. In addition, commercial property offers the prospect of steadily rising returns from rents which are commonly reviewed every five years. Bear in mind that property can prove difficult to sell in times of low demand.
Shares
Company shares tend to be classed as higher risk than other assets because in the short term their value tends to fluctuate more.
