Updated 24 March 2022
There are many reasons why you might want to invest. Equally, there are many ways to do it. The approach you take will depend largely on your goals, as well as on your circumstances and risk tolerance.
Most people start by thinking, ‘What shall I invest in?’ and consider a range of different asset types such as shares (like opening stocks & shares ISA), bonds or property. However, equally important is the method that you choose – that is, your investment strategy. How you invest can be just as important as what you invest in.
Broadly, there are five basic strategies that you might adopt when investing. Each has its particular advantages and disadvantages, and some may be more suited than others to particular financial goals.
When investing you should always spread your investment across a range of different assets and asset classes, rather than putting all your eggs in one basket. Not only does this reduce the overall risk, but it also enables you to balance out different investments – so that when one type is falling, another may be rising.
This spreading of investments called asset allocation. It should be carefully designed and managed, based on your goals, risk tolerance and length of investment. You can do this yourself, but more often a portfolio/wealth manager will do it for you. Here's how to find a good wealth manager to help you grow your investments.
A typical portfolio might contain a proportion of high-growth, high-risk assets such as equities (shares), balanced with medium-risk fixed-income bonds and some low-risk, low-growth cash. The equities and bonds segments might be further divided into lower and higher risk types.
Risk in terms of investments is ranked in four levels.
Once you invest your money, you have a portfolio to manage. The aim is to make the most of your investment by managing it in a way that generates income and balances risk with reward.
As your portfolio grows over time, some parts will grow faster than others. This means that you (or your portfolio manager) should regularly rebalance it to ensure that the mix of assets still matches your overall risk tolerance. Otherwise a portfolio that started with 30 per cent of its value in equities may end up with half its value in equities, which might be too risky for you.
You may also have the option of choosing an active portfolio management strategy or passive portfolio management. Active management comes with higher fees as it involves a fund manager actively chasing higher returns. However, there is little objective evidence that it is any more effective than passive management over the longer term.
Your financial adviser can get you started on the road to investing and point you in the direction of suitable portfolio managers.