Cheetham Jackson - Smart Investment

10 SMART MONEY “Don’t put all your eggs in one basket!” is probably the most succinct way to describe ‘spreading the risk’! By allocating your investment capital in a range of different assets and asset classes you will ensure you have a balanced diversified portfolio that will serve you well over time. Over-investing in one share, or one sector can result in disaster. Recent examples include the financial turmoil in Greece with its economic crisis.The problems with BP saw it’s share price and dividends severely affected. A diversi- fied well-spread portfolio reduces risk and moderates volatility. Consider the average investment returns, after allowing for inflation, actually provided by each of the major asset classes, Cash, Gilts, and Equities 4 : Cash Over the long term money on deposit has returned on average, just 1% above inflation 5 . £1,000 invested in 1900 would be worth £2,958 today. Gilts Likewise, returns on gilts have averaged 1.3% above inflation, turning £1,000 in 1900 into £4,087 today 5 . Equities The UK stock market has returned an average of 5.4% p.a. above inflation, turning £1,000 in 1900 into £308,763 5 . The conclusion from these figures appears clear-cut! The best investment returns are from the stockmarket! Whilst this is true over the long term, over the short term returns can be much higher, and just as importantly, much lower than the average. Our advice is simple: Don’t leave all your money in the bank (or the stock market) It’s just as foolish to invest all your money in the stock market as it is to leave it all in the building society (or the bank).Wise investors will spread the risk by investing some of their money in stocks and shares, some in fixed income investments like gilts (government stocks) and corporate bonds, and some in interest-paying cash accounts.When you do this, you will ensure you diversify your investment into a range of different asset classes, thereby significantly reducing risk. Perhaps one of the most important questions is: “How much should I invest in each asset class?” Naturally, all investors want the maximum return with the minimum risk. Common sense tells us this is impossible. Put all your money in the building society (or bank) and, at best, over time, you may just keep ahead of the return needed to beat inflation. Put all your money in the stock market and one year you could see growth of 30%, 40% or even 50%, and another year you could see it lose 30%, 40% or even 50%. However, over time, stock markets have produced the best returns of all, beating inflation (which averaged 3.9% p.a. over the past 100 years) by more than 5% per annum. Asset allocation – the key to successful investing Diversify Stock markets returns have beaten inflation by over 5% p.a. since 1900. ** +5 % 4, 5 Data Sources: See notes on page 17