If you have a pension, you’re already investing for your future. This video covers the basics of investing to help you make informed choices. We’ll look at:
- Why invest?
- Where to invest
- Understanding funds
- Balancing risk and return
- The final outcome
Investing potentially gives your money more chance to grow in value and beat inflation than putting it in a bank or building society.
Let's start by looking at the different types of investments (known as asset classes) available to you.
Stocks and shares are what many people think of when they think of investing. They're part ownership in a company and are also known as equities.
Next are bonds. These are essentially loans to a government or company, often for a set time period and usually in return for regular interest payments.
If you've ever bought a home or place to let, you've already invested in property. But property investment isn't limited to this. It also includes direct investments in commercial buildings and land, as well as indirect investments in shares of property companies.
Then there are money market instruments. These include standard bank and building society deposits, as well as deposits with governments and large corporations. They also include other investments that can have more risk and return than standard bank deposits.
There are other investment types that don't fit neatly into one of the other asset classes. This can include investments in commodities, such as oil or gold.
Putting all your money in one type of investment can be a risky strategy. You can help reduce that risk by spreading your money across a range of asset classes and countries.
Investing through a fund or funds is a way of doing this. Your money is pooled with other people's money and a professional fund manager will decide what to buy on your behalf, based on what the fund is aiming to do. There are funds which invest in just one asset class or country, and others which invest in a selection.
For more information about different types of investments and the funds you can invest in, see our guide 'How to choose the right investment options for your pension'.
When it comes to investing, there's always an element of risk. In general, the less risk you decide to take, the more likely you are to get your money back, but the less potential there is for it to grow. And vice versa, the more risk you take, the more likely it is that your money will grow.
The risk questionnaire on this website can help you understand your attitude to risk. If you're still not sure, you may want to speak to a financial adviser.
Investment value can go down as well as up, and at any time may be worth less than what was paid in. This is known as volatility and can be a result of a number of things, including what's happening in the economy, company profits and exchange rates for overseas investments. Over time, the effect of these ups and downs tends to be smoothed out, which is why you should generally invest for at least five years.
This chart gives an example of two types of investments:
A more volatile, higher risk investment, which is more likely to suddenly rise and fall in value.
A less volatile, lower risk investment, which is likely to have fewer and smaller rises and falls in value.
If you needed your money back at this point, the more volatile investment would be worth less.
If you can keep your money invested for longer, the more volatile investment could end up being worth more.
Once you've decided how much risk you're comfortable taking and chosen where to invest, it's important to understand what happens next and, most importantly, what you might get back.
The final value of your investments will depend on a number of factors – how much you pay in, investment performance, how long you long you invest for, how you take your pension savings and the impact of charges.
Generally speaking, the more you pay in, the longer you can keep your money invested and the better your investments perform , the more you're likely to get back at the end.
Remember though that the value of your investments can fall as well as rise and may be worth less than was paid in, even over longer time periods.