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A&J Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register, no 428590, at www.fca.org.uk/register
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Asset Classes

 equities

Equity investment is the term used for owning one or more shares in a company. This ownership gives you the right to a share in any profits paid out (as dividends) and also allows you to participate in share price growth that results - if and when a company is successful. 

 

Traditionally, equity investments have outperformed investments in other asset classes such as property, bonds and cash over the long term. However, they also carry the risk that you may not get back the amount you started with. 

The price of shares on stock markets go up and down on a daily basis. Even when a company is doing well, background economic news or other macro issues can bring their price down while people consider the wider impacts. You may have bought shares in the best company in the world, but if you need to withdraw your investment at a time when sentiment is against you, you will have no choice but to sell at a low price.  

More importantly, not all companies will actually be successful. Just because a company is listed on a stock market does not mean it will be good at what it does. Even if it is good at what it does, there is no guarantee that customers will always want to buy its products or services. When such a company does hit problems, the price of its shares can fall drastically – and this could leave you with a loss which you may never recover.  

There are therefore two main factors behind successful equity investment – diversification and time. 

 

Diversification

The way to help balance your potential risks is to buy more than one company. That way, if one of your choices does suffer problems, then any gains from another company or companies in your portfolio can help to mitigate the loss. 

For smaller investors, diversification can be achieved by investing money in a fund. A fund provides two benefits: 

  • you get access to lots of companies within one wrapper, for a fraction of the cost of having to buy shares in them directly;

  • the selection decisions and management of companies held within it is done for you, by a professional fund manager. 

 

There are over 2,000 equity funds available to investors in the UK. These cover a whole range of different investment areas, from UK only, blue chip companies to international and country specific funds. There are even funds covering high risk areas such as emerging markets and start up companies – if your attitude to risk is such that you would be happy with the higher level of volatility the latter examples experience. 

 

Time 

The second important aspect to equity investment is time; the time to make sure your money has a chance to grow in the first place and then the ability to defer withdrawing your money if something happens suddenly in the market that causes prices to fall. 

Most experts suggest that an investment in the stock market should not be undertaken unless you have at least five years to go before you will need the money. Assuming that in any one year, shares will outperform your building society account is wrong. However, as your timeline extends, the possibility that it will outperform increases. 

Of course, if we could all predict which years would be the best in the market and which would be the worst, there would be no issue with time. But we all know that is impossible. 

Even Warren Buffet would agree with that one. 

Please note: 

Past performance is no guide to the future. The value of investments can go down as well as up and you may get back less than you invested. 

When investing internationally changes in currency exchange rates may affect the value of an investment. Smaller companies and emerging markets carry higher level of risk than larger, more established companies and markets. Consequently, the suitability of any particular stock market investment depends on your personal circumstances and your attitude to risk.

 

 property

Lots of people own houses – and we therefore think we know all about property. 

Some of us rent houses – and seeing their value go up without being able to benefit is the thing that drives us to want to buy. 

 

We've seen our parents/friends/colleagues all appear to make huge amounts from flats bought when they were just starting out. And their position on the housing ladder has not only sorted out their living accommodation but will ultimately sort out much of their wealth and retirement plans as well. 

Investing in property is a great diversifier and has a place in most people’s portfolio. 

The main benefit is the income it provides - rental income that will usually be above the rate being paid by a deposit account or corporate bonds. The combination of this and the capital growth potential means it can be an attractive investment proposition. 

In fact, you will rarely find a multi-asset investment fund (or privately managed portfolio) that doesn't use property as an alternative investment on at least some level. 

However, investing in property is quite different from buying your home. There are downsides. 

 

First, you need a large amount of money. 

The reason we all have mortgages is because we can rarely afford to buy houses outright. The idea that you then invest in a second house - as a Buy to let - requires yet another significant deposit. Multiply that up to commercial property and you need a sizeable investment before you can start reaping the benefits from even a single building.  

Second, trading in property is costly. Surveyors, taxes, agency fees. Maintenance, upkeep & repair. Its not just the price of the building you need to raise, its the price of the people involved in the purchase (or sale) and additional taxes due on the price. And - the part which most people forget - you need the ability to pay the bills when you don't have a tenant; even when you're receive no rental income, the rates (and any loans) still need to be paid. 

Third, when you want to get your money back, it takes a while. In a boom, some properties may receive bids very quickly - but there are still legal hurdles to go through. You won't see the money for several weeks. In a falling or flat market, not only does the process take longer all round, you may actually have to accept a lower price than the valuation if you really need to get rid of it. 

Commercial property

Professional investment in property, though, is not about getting a buy to let with your spare money - or worse, raising a mortgage on your existing house to pay a deposit. And it’s not about relying on downsizing to fund your retirement income. 

Property investment is about diversifying your wider portfolio with a sensible proportion in commercial property assets that are owned by and run by a professional property manager. 

Because property is a specialist area.  

Unless you are a millionaire, therefore, the best way to approach property is to seek out suitable funds. If you're a smaller investor, multi asset funds will manage an amount of property as part of their core offering anyway. If you have more money and/or want to choose your own property manager, there are several specialist funds around. 

The question then is simply, how much of your total portfolio should be placed there.

Please be aware: 

It is not always easy to sell property quickly and, in order to do so, property may have to be sold at a price that is lower than the price paid.  

On an ongoing basis, the value of property assets is determined by professional valuers. Such valuations are the opinion of the valuer at a particular time, may not be supported by recent transactions and are liable to revision, up or down. 

Some forms of Buy to let are not regulated by the Financial Conduct Authority.

The value of investments can fall as well as rise, and you may not get back all of your original investment.

 bonds

Corporate bonds are a way in which companies can borrow money direct from investors, for example to fund business development or for mergers and acquisitions. When you buy a corporate bond, you are lending your money to the company concerned almost exactly as a bank would - i.e.: in exchange for the promise that they will pay you back a set amount of money on a pre-agreed future date and in the meantime, pay you an income in the form of interest on that loan.

The potential benefit of corporate bonds is that they should pay you a higher income than your building society account but with a lower risk to your capital than equities. The downside is that, if the company you have chosen goes out of business, or even just gets into passing difficulties, you may not receive all the income you were promised and/or perhaps not get back your original investment on that agreed future repayment date.

 

Grading the risks

Being able to assess the risk in any particular corporate bond issue is therefore a vital part in deciding whether it both fits with your own attitude to risk and that the interest rate you are being offered for your money is worth the potential downside. As you might expect, the higher the risk that you might lose money, the higher the interest rate a company will have to pay to persuade you to part with it. The lower the risk involved, the more people will be prepared to lend and therefore the lower the interest rate that company will have to promise in return.

To help with this process, two main agencies - Standard & Poor's and Moody's - offer a ratings service. This helps the company see how the market might view the risks in their issue and also gives the market a scale against which to measure an individual issue. This helps everyone assess the relative attractiveness of the issue and of the interest rate being offered.

Both companies use slightly different gradings but in essence, bonds rated AAA/aaa - BBB/Baa1 are considered 'investment grade' and those rated below BBB/Baa1 are called non-investment grade or 'high yield'. Once you get down to ratings of CCC and below, the companies are considered vulnerable, highly vulnerable or may even have already filed for bankruptcy, and the bond issues in this areas can colloquially be referred to as 'junk'. In other words, you will be very lucky if you get paid what is promised and should only even consider such an low grade investment if you are highly experienced AND can afford to lose some or all of your money when the expected happens.

Tax

The interest you receive on your corporate bond - technically known as the 'coupon' - is liable to income tax at your marginal rate. basic rate tax is deducted at source, so basic rate taxpayers need do nothing more. Higher and highest rate taxpayers must declare this income as part of their annual self assessment tax return. Non taxpayers, on the other hand, can claim that tax paid back.

 

High yield, or non-investment grade corporate bonds carry a higher risk and their suitability as an investment are subject to your own circumstances and attitude to risk.

 cash

 

Putting money in a deposit account is the most common way that we start to accumulate savings. The money is safe – ie: the underlying capital value is guaranteed - and you can get access to it quickly in the case of any emergency. 

Consequently, even the largest investors always have some money in cash. In fact, the rule of thumb is to hold the equivalent of between three and six months expenditure on deposit. That way, if the roof falls in or your car needs repair, there is money available to get you through the problem without having to access anything you might hold in higher risk or more volatile assets at a time when the market might be against you. 

Longer term, however, there can be issues with holding all your money in a deposit account, particularly if you are relying on this asset alone to fund your future. 

 

The impact of inflation

Your capital is guaranteed, so you will not lose money in absolute terms if it stays in a deposit account. 

However, in real terms, inflation can have an impact. Prices rise over time so what you can buy in five, ten, twenty years with that capital is likely to be less than you can buy with it today. Of course, your capital earns interest which can help to mitigate any inflationary effects, but sometimes that interest payment will be higher than the rate of inflation and sometimes that interest will be lower.