Investment

Investment can be defined as “putting money into a type of asset which can fluctuate in value”. This is distinct from savings which is the regular accumulation of money usually in a cash account or low risk account

So often we read or hear from friends about the next “ sure thing” which will make us rich over night (or with in a short amount of time). Although this can happen it is not the norm or expected expectation when you are creating wealth. With every investment as well as the rewards of getting more back, you are also exposing your money to the risk of losing some or all of it

An investment has two sides to it

1. Risk

2. Return

Risk is when there is a likelihood that we may not receive our interest as it is due. Or worse still we may not get all or part of out capital back. Assets that fluctuate, that is pay returns according to the economic cycle can have good years and bad years. Most assets have the potential to one day do well, and at times it is a matter of waiting long enough to suit your needs. Risk is about uncertainty and volatility of returns over future years.

Returns vary according to the asset where we put our money . Cash returns are generally expected to be the lowest, as there is less risk and a higher certainty of the return in the future. The other asset classes are fixed interest, property and shares.

Fixed Interest – spans a wider area of risk, from Government Stock or Bonds through to Corporate bonds which we will often refer to as “junk Bonds”. This name has come about because the risk is far greater than the reward or interest rate the investor is being offered. The risk we are talking about is that the company issuing the “junk bond” may end up with financial difficulties. This could mean we lose all our money and not receive any interest payments. Refer to the article on Rating Systems to learn how you can compare a companies financial stability before you invest.

Property is more familiar to us all, and with in this area there are subsets which all have different market cycles. To look at Commercial Property – large city buildings, when the economy is doing well and businesses need space to operate most buildings will be fully occupied. This is good for the property owner as it assures them of rental into the future. When however the economy is slow and folk are laid off from their jobs, vacancies can start to appear and this will affect the landlord, as rental income may also drop off.

Shares or Equities as they are some times called, are when you own a small piece of a company. You would mostly not own a majority ownership, or have enough shares to give your opinion on how the company is run on a day to day basis. Investors assist the company in funding the purchase price at the original outset. When a company has been operating for many years and we buy some of their shares on the second hand market when an exiting owner wants to sell their holding. The current business is not affected we are completing a transaction with another trader completely outside the operation of the business.

If a company does well and grows, our shares can increase in value, and so reward us for buying our piece of the company. Companies also pay dividends, which are like receiving interest at certain times depending on how much profit the company makes with their manufacturing or selling their products. To invest in shares you are taking on the risk of the current management team, product mix, market trends and the stage of the economic business cycle

There are also specialist investment products like forestry, antiques, art and specific financial vehicles that have been developed like derivatives. These are not often used directly by everyday investors, but can be incorporated into managed investment products.

Investing is a specialist area which requires knowledge. The role of a Financial Adviser is to assist you to clarify what your risk profile is, how long you want to invest and what asset class as described above best fits your needs.

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