Just as an athlete needs a balanced diet to achieve peak fitness, you need balance in your investments. Here’s a quick digest of the different financial food groups, along with tips for combining them into your ideal money-building diet.
Healthy living means healthy eating. The same is true when it comes to keeping your finances in good shape. So if you want your money to grow and thrive, it helps to understand the different classes of investment and what makes each one special. Just what are the key differences between equities and commodities, for instance? Whether your interest is pension-related or about boosting short-to-medium term income, we’re covering all the major food groups so you don’t get investment indigestion.
Think of cash assets as being like fresh fruit. They’re within easy reach and great for snacking – that is, covering the everyday expenses that crop up. However, just as fruit doesn’t really fill you up, cash investments don’t deliver great growth. Also they can quickly decay due to inflation and tax, so it’s best to keep them wrapped – in an ISA, for instance.
You should always have plenty of veg in your diet. Similarly, make room for bonds in your portfolio. Bonds, like vegetables, aren’t that exciting but they are fairly dependable. They’re essentially loans (to a government or corporation) that pay back a steady rate of return that typically beats cash (if at a slightly higher risk), so they keep your portfolio well nourished.
High-protein foods like meat, fish and eggs are muscle-builders, great for athletes in training. Equities (i.e. stocks and shares) can have a comparable effect on your money. For high levels of growth they’re hard to beat, but beware. Over-reliance on equities is dangerous, as the risk they carry is much higher – so remember that too much protein can cause health problems.
Property is often seen as a cash cow, but that’s not why we’ve classed it as dairy. Milk and cheese is calcium-rich for strong teeth and bones, and property delivers the same sort of dependable long-term growth. The downside? Dairy is high in fat, which means the energy is harder to get at – just as it’s hard to get at money that is tied up in property. So although it’s a great financial food group, don’t over-indulge.
Commodities can include gold, other metals, cattle and yes, actual grains. Risk-wise they are similar to equities, but don’t grow as much and don’t pay dividends. So why would you invest in them? One possible advantage is that they tend to perform independently from equities, so while equities are falling, commodities may be steady or rising. This means they can serve to balance out the equities in a portfolio – just as an athlete will load up with carbs as well as eating lots of protein.
Balancing your diet
The menu that you choose for your money depends on what you want to achieve. If you’re selecting investments for a pension fund, your choices may be very different from those you make for a shorter-term investment. If your goal is maintaining financial health through tough times, then you’ll probably want a more balanced spread of investments, with plenty of roughage from bonds and cash. If, however, you’re training up for aggressive growth, you might risk a high-protein, equity-rich diet. Different situations call for different combinations. Also, as your fund grows, you will probably want to rebalance it regularly so that your overall risk exposure remains under control – for example, you don’t want an equity surge to leave you with a disproportionate amount of your money in that high-risk area.
There’s no one correct investment strategy, any more than there’s one wonder diet. Your approach should be flexible and responsive to your circumstances. But by understanding the different asset classes and their pros and cons, you’ll have a better idea of how to feed your financial goals.
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