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What type of investor are you

June 1st 2010

1.       Your age and timescales – people’s attitude to risk may change over time; for example,  when you are younger you may be more willing to take more risk and a longer-term view, whereas if you are older and nearing retirement, you may be less willing or able to take as much risk with investments.
 
2.       How much money you have – if you have a lot of money, you may be prepared to take more risk with some of it, in order to potentially receive a higher return. If you don’t have much to invest, you may want to keep most of it in lower-risk investments
 
3.       Other investments – if you are already investing for your retirement, for example in a pension, you may feel that you can take more of a risk with other investments
 
4.       Your investment goals - you may have a different attitude to risk for different investment goals. For example, you may be more willing to take a risk with your pension fund when you’re younger but less willing to take a risk for a shorter-term investment goal, such as saving towards a house deposit or a wedding. In any case, the greater the return you’re looking for from your investment, the more risk you’ll generally have to accept.
 
Risk and the different types of investments
 
All of the above factors will have an impact on the type of investment which is suitable for you.
 
1.       Cash – cash investments, such as bank or building society accounts generally give you easy access to your money and carry the lowest risk of the main asset classes. However, they also tend to provide lower returns over the medium to long term, particularly when interest rates are low. Also, inflation can mean that the price of goods and services rises faster than your savings grow, so your money is worth less.
 
2.       Bonds – bonds are a type of investment offered by governments, companies and corporations, whereby investors ‘lend’ them money over a set period for an agreed rate of interest. This interest rate may be fixed at the outset or be linked to an index such as the Retail Price Index. At the end of the loan term, the bond issuer should repay the original loan. In general, bonds are less risky than shares and offer the potential for higher returns than you might get from a bank or building society account. However, there are risks involved. For example, companies or governments may not make the interest payments or even repay the loan. The value of the bonds can also fall if interest rates rise or if demand to invest in them is low.
 
3.       Property – if you own your own home, then you have already invested in property. You can also buy a property to let out or develop and then sell. If you let a property out, in addition to the potential for its value to increase, the rent you receive will also give you an income. However, you need to remember that a decline in the property market may mean that you have difficulty selling your property or you may have to sell it for less than you paid for it. In addition, if there is a decline in the rental market, you may not be able to find tenants.
 
4.       Equities – these are shares in a company which is listed on a stock exchange. Once you invest in a company’s shares, you become a shareholder and effectively a part owner with the right to vote on important matters. You may also get a share of the company’s profits in the form of a dividend. However, equities are considered to be riskier than most other types of investment as prices can fluctuate considerably. This means that they’re more suitable as a medium to long-term investment.
 
As well as investing directly in cash, bonds, property and equities, you can also invest through funds, where
you pool your money with other investors. Fund managers generally have access to a wider range
of investments than available to individual investors.
 
Top Tips
 
Diversify – avoid over-exposure to a single asset class, such as equities. Instead spread risk across a number of
other asset classes, including bonds, property or cash.
 
The longer-term view – it’s generally accepted that keeping funds invested for the medium to long-term, can
average out market highs and lows. So if you’re able to take a longer-term view, it can make sense to stay
invested for the potential to benefit from an upturn in markets