Money Matters: Moving Along the Risk / Reward Spectrum
Writing a periodic series about Money Matters! and trying to untangle some of the myths and misunderstandings that are commonly held, not to mention the lack of awareness of all of the possibilities, can be a challenging task at the best of times. Throw into that mix ever changing legislation and market forces and this task becomes even more of a challenge.
My approach to this series has been a logical one, starting with an outline of why savings are necessary and trying to distinguish between short term ‘emergency’ savings and long term ‘retirement’ savings. In the previous articles we have considered the lowest risk savings, but sadly those are also the ones giving the lowest reward, and in this era of extremely low
interest rates these ‘rewards’ are actually negative once inflation is considered.
Today we start to move up the risk / reward spectrum and look at the safest way to invest in stock markets around the word. I write this at the end of the last week in February 2020, a week that saw US$6trn wiped off global markets due to the Coronovirus panic, but that does not alter in any way my comments here or the very important role that investing in stock markets via unit and investment trusts play, and my belief that they are a must as part of a long term savings plan. This week may have seen the biggest drop in the markets since 2008 but over the last 100 years there is literally only a few times where the market is not up over any 10 year cycle. For most of us with a longer term approach it is best not to try and time the market but simply to ride the downs and benefit from the ups.
Investing directly into individual shares takes more knowledge and time than many people have, but exposure to the global markets can be obtained by investing in unit and investment trusts and they have the added benefit of being much lower risk also. These types of trusts are called collective investments and they are exactly that; you invest in your chosen trust and leave it to the fund manager’s expertise and knowledge to decide exactly what companies to invest in, when, and how much. As the trust invests in many underlying companies your investment is largely protected against troubles in any one of the companies that the trust has invested in.
Unit and investment trusts can be purchased through any online investment platform but two of the biggest are Fidelity and Hargreaves Landsdown. To use Fidelity as the example, it runs its own funds and has some £330bn of funds under management for 2.4 million clients worldwide, but on its platform it also hosts a total of around 3,500 unit and investment trusts from all of the other major providers. This large number of funds might seem daunting but, in reality, it is made easy to chose the bigger funds or the more common areas, so there are funds for everyone from complete novices to very sophisticated investors.
Within the vast number of funds are those that range from lower risk to higher risk, and from being very tightly focused on a sector or a geographic region, or having a very wide remit. The choice, is of course, up to you as the investor, and should be decided upon largely based upon your attitude to risk and your time horizon. As explained, each fund diversifies your risk as it invests in many underlying companies, but you can, and indeed should, diversify your risk even further by investing in a number of different funds with different focuses rather than investing in just one.
Next time we will look at investing directly into individual company shares.
Kevin R Smith, CEO at BOOM & Partners is an entrepreneur and a business and finance consultant with over 35 years’ experience in helping entrepreneurs and directors to grow their businesses. He is a Mentor at the UKs largest Entrepreneur Accelerator and has broad experience in all sectors, and has particular strengths in Women in Business, and Fintech, and partners business owners on their journeys. Nothing in the above article is intended as a recommendation but simply his opinion on what readers should be thinking about.