Investment assets are like golf clubs – you might need a driver or a long iron when you’re teeing off for distance. And you’ll always use a putter on the green. You need the right club for the shot to play your best game of golf and get your lowest score.
Investing is similar but here you are looking to generate the highest level of return for the level of risk that you are prepared to take. To be a successful investor you need to think about how you use the different asset classes (aka golf clubs) and how you take advantage of their different strengths to get you where you want to go in the fewest possible strokes.
Each type of asset is likely to give you a different level of expected return, and volatility (the measure of how much the value of an investment fluctuates).
- Shares have the potential for higher returns, but also have higher volatility.
- Property has the potential to also provide higher returns with less volatility but possible lower levels of liquidity.
- Bonds offer lower returns with lower volatility.
- Cash is the least volatile with the lowest return (particularly with the Bank of England base interest rate at 0.5%!).
Put all these asset classes onto a graph and you can see where they sit from low-return, low-volatility to high-return high-volatility.
When planning for your financial future, your timeframe is key. If you’re looking to save for something short-term like a holiday – then you would choose something less volatile like cash. However, if you are investing for the longer-term then you may choose shares, where you’ll accept more volatility for higher longer-term returns.
Quiz: When saving for something long-term like your retirement should you invest primarily in…?
- Cash and bonds
- Reflect on your goals. Is your money invested in appropriate assets?
- Log into Time Machine to see where your weekly investments will take you…
- Review your settings, and tweak your weekly or monthly deposits accordingly
- And you can adjust your allocations in app (Settings>Allocations)
Quiz answer: 2