“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.”

So said legendary investor Warren Buffett. Or put simply, investing is when you put your money to work for you. You buy an asset which you hope will increase in value over time e.g., a stock. Although the value of any investment can go down as well as up, and you may not get back what you put in, it has the potential for greater returns than putting your money in a bank savings account.

Types of investments

An asset class is the collective term given to different categories of investment instruments, with varying degrees of risk. Broadly speaking, these fall into five main categories: equities, bonds, cash, property and alternatives.

– Equities: also referred to as stocks or shares. Company shares are traded on stock markets – and if you own equities or stock in a company, then you’re a shareholder – or a partial owner of that company.

– Fixed income or bonds: debt instruments issued by governments or companies when they need to raise money.

– Cash: money on deposit (eg, cash in a bank).

– Property: investing in commercial property but it can also include residential property.

– Alternative investments: investing in non-traditional assets or strategies eg, hedge funds, crypto currencies.

Diversification

Asset diversification is the strategy of investing in a variety of asset classes and a variety of assets within those asset classes.

For example, if there are a lot of companies spread across multiple industries and one company or sector collapses, the other companies and sectors within your portfolio should help to insulate you against losses and protect your overall portfolio.

Other factors to consider when deciding which asset classes should go into your asset allocation include global events; geographical areas; and politics. Different events can have diverse impacts within asset classes.

A portfolio of assets that is well diversified helps to protect your investments. It also helps you achieve the most consistent returns in the long term and consequently, helps to achieve your investment goals.

Put simply, do not put all of your eggs in one basket – remember to diversify.

What risk level are you comfortable with?

Risk is the potential for making money and losing money – the greater the risk, the more we would be expected to make, or potentially lose.

No investment is risk free. When we think of risk, the first thing to consider is how comfortable we are with different levels of risk: are you risk averse? Or would you prefer to take on more risk? Once you understand where you sit on the risk spectrum, it’s easier to plan your investments accordingly. Your risk appetite tends to change with your age and your subsequent needs. People in their 20s tend to be more adventurous and prefer to take on more risk with the potential for greater returns. But as people get older, they prefer to take on less risk and have a lower but more reliable income.

Different investment goals also influence risk. People tend to take a more risk averse approach for things like their education and pension funds, but you may be happy to take on a greater amount of risk for a small proportion of your funds. This ties in with the level of risk you can afford to take. Time is a great defence against risk. The longer you leave your investment to mature, the more you’re insulated against market dips and bumps. As a general rule of thumb, higher-risk investments, including shares, have the potential to give you higher rewards. Lower-risk investments tend to equal lower rewards.

The two main factors that impact the risk of your investments are the type of assets you invest in and the length of term of your investment period. It’s best to invest in well diversified asset classes over a longer period of time – this will help mitigate risk.

Finally, it’s always important to remember that the value of your investment may down as well as up – and you may lose some or all of the money you invest.

Now that you know the basics of investing, it’s time to familiarise yourself with investing terms. Read more here.