Investment is a risky business. It’s important to consider spreading your money between the four main asset classes – cash and deposits, stocks and shares, bonds and property.
Cash and deposits
You will often hear the saying “cash is king.” That’s because it’s true. Everybody enjoys the ready spending power that cash brings. However, if you keep all of your savings under the mattress, it doesn’t earn you any money. So, be smart and keep cash in a deposit account for your short-term spending needs (or as part of your longer-term investment strategy, if appropriate). In periods of incertainty, people tend to favour the safety of deposit accounts.
Stocks and shares
Let’s face it, shares can really scare people. This needn’t be the case. Although stock markets have taken a tumble in recent years, history has shown that investing in shares is the best way to make money over time, as it outperforms any other asset class. Many companies reward their shareholders with dividends (regular payments) based on the profit they make. These can provide another income stream on top of your capital appreciation (growth) of your initial investment. Some shares are riskier than others and everyone must decide their appetite for risk. In general, the riskier the investment, the higher the potential reward.
Of all the asset classes, bonds are probably the least understood by the public. A share is like a tiny part of a company but a bond is like an I.O.U. You agree to lend money to a company or to a government. In turn, you are repaid with an agreed rate of interest after a set ‘maturity’ date. In Ireland, most people invest in bonds through their pension fund or as part of a broader investment portfolio. Generally, bonds don’t earn as much as shares over the longer term but they tend to be safer because your initial investment is usually guaranteed.
Unfortunately, many people have learned that property investment is not a one-way bet. By its nature, property is the most inflexible asset class. If you need access to money quickly, it isn’t for you. Investors with a long-term view may have better results but it’s all about location, location, location – and good timing. Building up a property empire could seem like a good way of making money in the long-term but it’s better to spread your investment risk and buy different types of assets. As the old saying goes, don’t put all your eggs in one basket. For specific advice on any of these options, consult a financial adviser.
This article was adapted from Margaret E. Ward’s booklet, Saving & Investing for Life, which was commissioned by Permanent tsb