There's no doubt about it, investing can make your head spin. To cut down on the scary bits, you should use a simple combination of three asset classes.
The following three assets should form the basis of any balanced investment portfolio, as they will all expose the investor to different levels of risk.
Cash (lower risk)
Cash based investments include things such as deposit accounts and mini-cash ISAs. They're all very low risk and more secure. They're also a great idea for short-term investing or as a place to put emergency funds, because you can access your cash instantly. It's worth noting thaat there is a danger that over time, rises in inflation will munch into the value of your savings, particularly if interest rates are lower than inflation.
Bonds (medium risk)
You need to keep your thinking hat on here. You see, most of the time bonds offer a lower risk than equities. However, some bonds are stock market linked, which means they can behave more like equities.
If you're looking for less volatile bonds have a gander at corporate bonds and government bonds. People tend to buy a load of them when the stock market is all over the place. They're a pretty safe bet when everything around them is going pear-shaped.
Equities (higher risk)
Equities have always been the most volatile asset class. The thing about equities is that you're actually buying shares in a company. So how well your shares do depends on how well the company does amongst other things. If the company goes belly up, then so do your shares. But if the company does well then you stand to make a packet.
While they've traditionally been the most volatile asset class, equities have also provided the greatest levels of growth, over the long-term.
Here's how the three asset classes can be used, depending on how much risk you're happy with:
Source: Co-operative Bank Financial Advisers Ltd
"Thinking about your objectives and your attitude to risk, what proportion of cash, bonds and shares would go into your portfolio?"
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