Why Invest in Shares and not just Cash?
It's true that putting money in shares and other types of investments is more risky than investing in cash - events over 2008 and early 2009 have gone a long way to showing this. However, historically, over the medium to long term, the returns from shares have been better than cash.
Past performance is no guide to the future. Your investment may go down as well as up and you may not get back the full amount of your original investment.
Spread the risk
You could also try to lessen the risk by spreading your money across a range of assets, combining different types of investments:
- Shares
- Fixed Interest - corporate and government bonds
- Property
- Investment Bonds
- Cash
Remember, simply investing in cash also has risks. For instance, inflation may erode the generally lower returns you would tend to get from a savings account.
Different types of Investment - Active vs Passive Investment
Active managers can deliver high returns but picking the right one is hard to do.
If you’re placing your money into an investment fund, there are two main strategies you’ll encounter - active management and passive management.
Debate has raged over the years as to which is the most effective way to invest your money and, certainly, within the unit trust and OEIC space, your choice of actively managed funds heavily outweighs passive funds. There are over 2,000 actively managed funds and only 70 passive funds listed by the Investment Management Association.
However, access to passive investment strategies has risen dramatically in the past few years with the introduction of exchange traded funds (ETFs) to the mainstream.
What is active management?
Actively managed investment funds are, like their name suggests, run by a professional fund manager and/or, investment research team, who make all the investment decisions, like which companies to invest in or when to buy and sell different assets, on your behalf. They have extensive access to research in different markets, sectors and often meet directly with individual company executives to analyse and assess their prospects before making a decision to invest.
The aim with active management is to deliver a return that is superior to the stock market that the companies sit within. An actively managed fund can offer you the potential for much higher returns than what a particular market is already providing.
It also means that you have somebody tactically managing your money, so when a particular sector looks like it might be on the up, or one region starts to suffer, the fund manager can move your money accordingly to expose you to this growth or shield you from potential losses.
How does this differ from passive management?
Passive investment funds will simply track a market, and charge far less in comparison. The funds are essentially run by computer and will buy all of the assets in a particular market, or the majority, to give you a return that reflects how the market is performing.
Some areas of investment are much better suited to active rather than passive management. Property funds, for example, buy commercial properties and pay returns based up rental income and increases in capital value of the properties. A tracker fund simply cannot do this and it may be valuable to invest in an actively managed property fund.
An active manager might also be useful in more specialised areas, like technology, healthcare, smaller companies or emerging markets like China, where expert knowledge can help to seek out value.
If you're not sure how you could be investing your money, we would recommend you speak to us and we can help you with your options. We may have to make a charge to you for this advice.
Important
Investing in the stock market may mean you become liable for tax. To find out more about this read our section on investment and taxation.
A stock market investment is not like a bank or building society deposit account. It may return less than has been invested, whereas a bank or building society deposit account would normally return all your capital. You should consider keeping any money, which might be needed in the short term, in a bank or building society deposit account. This is generally secure and readily accessible.
