- It’s always good to know what your investments consist of
- Busting the jargon can help you get your head around the world of investing
- We delve into what you need to know about your portfolio with evestor
Our investors often ask what their investments are made up of or what they’re actually investing in. The short answer for this is that your money is invested into different ‘asset classes’ - but what actually are ‘asset classes’?
Investing and the world of financial advice can be confusing, especially for first time investors. Many companies try to overcomplicate things even further by using lots of unnecessary jargon and complex fee structures.
Here at evestor, we want our investors to feel confident and comfortable with their investments.
In this blog, we’ll break down your investment portfolio with us.
Let’s start with our funds
When you invest with evestor, your money is put into something called an “index fund”.
Essentially, an index fund is one big pot of different investors’ money all pooled together. Depending on the type of fund, the money is then used to invest in in 4 different asset classes; cash, properties, bonds and equities.
What is an “asset class”?
The official definition1 of an asset class is “a broad group of securities or investments that have similar financial characteristics”.
As simply as we can put it, it’s a type of investment. With evestor, there are 4 asset classes your money will be invested into:
Cash – The “safest” of all the asset classes. Holding your money in cash is almost risk free, but it has limited returns. We use cash as part of our investors portfolio to control the risk level of the portfolio. A higher risk portfolio will have less cash investment, and a low risk will have more.
Properties – A misconception here is that you are investing in the brick and mortar of an actual house. Instead, what you’re investing in through the Real Estate Investment Trusts (REITs) is the companies that build, buy and operate commercial property. This could be offices, shopping centres or hospitals.
Bonds – Bonds can be quite a confusing asset class until you break it down. A bond is a loan or a debt issued by governments and companies. Bonds allow them to borrow from investors at a fixed level of interest. When the bond is repaid, a portion of the interest earned goes to the investors who funded the bond. This is how bonds can make a return.
Equities – Equities can give you better returns than the rest, but can also be the riskiest. Owning an equity, stock or share (which are all the same thing) means you own a small part of a company, giving the investor the opportunity to profit in the company’s future earnings. Some of the companies that you’ll be investing in with evestor could include; Amazon, Facebook, Vodafone and many more household brands from around the world.
How does risk level impact my investment?
At evestor, we have 3 different investment portfolios, going from lowest risk, to medium risk and then highest risk. With each portfolio, the investment is split up into the above asset classes.
With the lowest risk portfolio, we keep 22% of your investment in cash, which does have the lowest potential on returns but that’s why it lowers the overall investment risk. Equities take 24% of the investment, Fixed Interest Bonds take 54% and we keep 0% of the invested money in property.
You start to see changes when you look at our medium risk portfolio. Cash is lowered to 6%, as this can free up more of the investment for the higher risk asset classes. We start to invest in property with it taking 5% of the money. Fixed Interest Bonds almost halves to 28%, and we push the remaining 61% into Equities. That’s almost triple of what we would invest with our lowest risk portfolio, but as the name suggest, you’re taking more risk for possible higher returns.
Our final portfolio is the highest risk. It invests the majority of the money at 89% into Equities. The remaining 11% is shared between Property (5%), Cash (3%) and Fixed Interest Bonds (also 3%).
What is diversification?
“Diversification” is another piece of jargon that is quite simple when you break it down.
In the simplest form, it’s spreading your money into different investments so you’re not putting all your eggs in one basket. With shares for example, it can mean spreading the investment between companies in different industries or investing in businesses in different markets across the globe.
Diversification within investment helps to minimise and control risk. For example, if you invest £1000 into one company and then it dips, your total funds take a dip. However, if you split that in 2 and have £500 in two different companies, one may dip but the other could prosper, meaning that your total fund may not suffer as much from the loss.
If you think you might be ready to start investing, we can tell you whether investing is right for you.