For example Tesco might issue a bond for 10 years at 4%. This means that the buyer of £10,000 of these bonds lends Tesco £10,000 for ten years. During the ten years, Tesco will pay the investor 4% per year, or £400, and at the end of the ten years, the £10,000 will be returned to the investor
The creditworthiness of the company is important as a company that is seen as more risky (with a lower credit rating) will have to offer a higher interest rate to attract lenders.
During the ten years, the bond can be bought and sold. The price will depend on how the interest rate compares with interest rates more widely. For example if interest rates are low, the bond will be relatively attractive and the price will be higher than the £10,000 initially paid.
If the credit rating of the issuer changes, the price of the bond might also change. For governments, bonds are the main way they can raise funds without increasing taxes. The UK treasury issues bonds which are known as gilts – (they are called this as in the past the paper bonds were gilt-edged.)
As a class, bonds are usually less risky than shares. This is because interest rates do not change on a day-to-day basis, although a shift in interest rates will affect all bonds. Like shares, individual bonds are generally more risky than a portfolio of bonds, and it is possible to buy a bond fund representing a large collection of individual bonds.
Read more about bonds, what they are and how they work on the Nutmegonomics blog.
“An investment in knowledge pays the best interest.”
— Benjamin Franklin
There are two types of property for investment: residential, which is accessed by buying-to-let, and commercial property, which is most often accessed by property funds. For both, the income stream is from the rental, and it is hoped that the capital value of the property will increase as well.
Whilst on average property prices have been increasing this has not always been the case, and in some areas of the UK, and wider global markets, property prices are falling.
Property is an illiquid asset. It can take months, or even years, to find a buyer for a property and then several more months to complete on the property sale. Essentially, you have to consider your deposit and any equity you accumulate as locked in until you sell your house. Another big risk is related to interest rates. If you have a mortgage and the interest rate goes up, it might be some time before you are able to increase your rental income to cover the mortgage costs.
You also need to remember the extra costs of buying and maintaining a property, such as stamp duty, solicitors’ fees and insurance.
Read more in our paper: Should you invest in property or stocks and shares? (pdf).
The amount of money in your bank account will not change in response to external events, but its value will be affected by inflation.
The two risks of investing in cash are inflation and bank failure.
While very unusual, banks have failed in the past. Your cash is usually protected by the financial services compensation scheme up to a maximum of £85,000 in each bank, although you might have to wait a short time to get hold of your money.
For example it is riskier to invest everything in the FTSE100, rather than having some gilts and bonds as well.
So which type of assets do you pick and how much of each?
This depends on your appetite for taking on risk. A slow and steady approach will typically have more bonds and gilts, while a more growth focussed strategy will tend to have mostly shares from a range of countries, but may have some other assets as well.
Find out more about choosing your investments in Putting it all together or see more about risk and deciding on the risk strategy.
Risk warning. As with all investing your capital is at risk. Past performance is not an indicator of future results and future returns are not guaranteed.
#1 Understanding investing
Should I invest? How does investing work? Learn how investing puts your money to work and about compounding and inflation so you can make the right decision about investing.
#2 Understanding investing
How much risk should I take with my investments? We explain how to think about investment risk in terms of risk and reward, your attitude to risk, how much you can afford and your investment goals.
#4 Understanding investing
Where can I go for help deciding what to buy? Do I go it alone or get some help? In this guide we describe the different ways of building a good portfolio so you can decide what is best.
