Thursday, 10 October 2013

Asset Allocation and The Importance of Spreading Your Risk















There is no investment that does not incorporate an element of risk. As much as we’d all like to make a ‘safe investment’, in reality, there is no such thing, although the level of risk inherent in particular investments can vary wildly. Seasoned investors understand that risk is an implicit aspect of every investment, as shares can fall in price and economic conditions can vary on a day-to-day basis. In this post we aim to identify the different types of investment that are available, and provide pointers on how best to control your level of risk by creating a diverse investment portfolio.

Asset Classes

Asset classes are all associated with varying levels of risk and anticipated returns over the medium to long term, and as such, there is no one asset class to turn to in search of the best performance over a given period. An asset class is made up of three main classes of investment: equities, bonds and cash. Each of these classes is associated with a different level of risk and return, as well as the time frame in which you can expect to see a return.

Equities

Equities, commonly referred to as shares, are issued by public limited companies (PLCs) which are listed on the stock exchange. By buying a share in a PLC you become a shareholder and effectively own a small part of that company. As such, your investment is intrinsically linked with the fortunes of that company. If the company performs well financially, the share price will rise, which can lead to capital growth for the investor. It is also possible to receive income in the form of dividends, which are paid annually based on the company’s performance. The risk element of the investment is that, if the company does not perform as well as expected, the share price will fall below the level of your investment and you will be out of pocket.

Bonds

Bonds, otherwise known as ‘fixed income securities’, are commonly issued by government and businesses as a method of raising money. Bonds effectively act as an I.O.U. and provide investors with a regular stream of income, which is usually specified and returned over a predetermined period of time. Once issued, bonds can be traded between investors without the issuer’s involvement. Bonds generally offer a steady rate of return but at a lower risk than equities, which can provide a higher return.

Cash

Traditionally, cash is held in a bank account where it can accrue interest. However, cash funds also have considerable market power, which can be used to access a better rate of return on deposits than you would receive from a bank account. Cash is often used in short-term bonds known as ‘money market instruments’, which is a convoluted term to describe the process of banks lending each other money.     

The characteristics of risk

Each asset class is associated with a different characteristic of risk. Young investors are often prone to selecting higher risk investments with the potential for a higher yield. However, as people near retirement age and they have a substantial investment fund they’d like to protect, more conservative investments with a steadier rate of risk and return are de rigueur. Although risk cannot be avoided completely, by putting all your eggs in one basket you are much more exposed, so diversification is key.   

The need to diversify

This is particularly important with share and bond investments, although diversification is still recommended with cash investments, despite the low level of risk associated, as the level of interest you receive is subject to market fluctuations. Even choosing not to invest is a decision which carries an element of risk. The key to diversifying is to find the right balance of risk and return for you and to incorporate a broad range of asset classes.  

If you’re looking for an experienced team of financial advisers, Cardiff based Bartholomew Hawkins can help. With a bewildering number of investment opportunities available, they can help you create an investment portfolio which perfectly reflects your tax position and attitude to risk.

The above article has posted by Amy Lewis, owner of the finance corner. For more details about Amy you can visit her social media profiles in below mentioned urls: