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Which investments should you include in your portfolio? An asset mix (or allocation) can include stocks, bonds, cash, property, cryptocurrencies and other niche investments (e.g. property loan notes). Investing across different assets helps to “spread your risk” and mitigate those that may be specific to each one. In this article, our team at Bure Valley Group shares the key features of four broad asset classes and ideas to achieve an optimal balance for your allocation. We hope this is helpful to you. To find out more about our EIS and other investment opportunities in our exclusive investor network, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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Equities
Equities allow you to invest in company shares, giving you a stake of ownership. These tend to refer to publicly-listed stocks (e.g. FTSE 100 companies) which you can trade on an exchange. Of course, these assets can be volatile but, historically, they have delivered strong returns. You can mitigate taxes on your returns by investing via an ISA or a pension, although the latter will lock your money away until age 55 (rising to 57 by 2028).
Equities can be suitable for a portfolio if the investor is looking for growth and is comfortable with his/her investments rising and falling frequently (as the stock market fluctuates). Equities can also provide a regular income via dividends, although these companies may offer less growth potential (since profits are distributed to shareholders rather than reinvested).
Startups & private equity
Not all businesses that you can invest in are listed on public exchanges. Angel investors, for instance, offer funding to startups in exchange for an equity stake. Venture capital trusts (VCTs) are an interesting case, since they represent a potential “fusion” of public and private equity. This is because VCTs themselves are publicly-listed companies, but invest in private companies on investors’ behalf.
The main benefit of investing in early-stage companies is the high potential for growth on offer (e.g. 30% returns or even more). However, private equity may not be the best route to generate an income. The risk of business failure is also higher compared to large public companies. An investor can offset this somewhat by investing via tax-efficient schemes like EIS (the Enterprise Investment Scheme), which offer a “loss relief” mechanism if the investment fails.
Fixed-income securities
The central idea of fixed-income securities is the investor lending money to another entity with interest. Gilts, for instance, refer to bonds where investors lend to the UK government over, say, one year (or potentially much longer; e.g. 30 years). It is also possible to lend to businesses via corporate bonds, or to a property developer via property loan notes.
Fixed-income securities can be a great option for income investors due to the regular interest payments. Many are also considered “lower risk” compared to equities since there is a greater degree of certainty and predictability about future investment returns. However, bonds can be vulnerable to interest rates (e.g. the base rate set by the Bank of England). If these go up, then the value of previously-purchased bonds can fall since new bonds can be bought with a higher interest rate offered to investors.
Corporate bonds and property loan notes also carry the risk of business failure and/or cashflow problems, leading to problems with paying investors. These can be mitigated by choosing bonds with a higher credit rating (although these tend to offer lower returns) and by prioritising property loan notes which are secured against specific land and/or property with values far outweighing your investment. This helps to protect your capital if the project fails.
Currency-based investments
Cash is the most prominent sub-type within this asset class. Whilst it is a useful store of wealth for a short-term goal (e.g. an imminent mortgage deposit) due to its shielding from stock market volatility, it will erode heavily over the years due to inflation. Other ways to invest in currencies can offer higher potential returns, such as FOREX investing (trading foreign currencies) and investing in cryptocurrencies.
FOREX is similar to equity trading in many ways, but the leveraged ratio tends to be higher – increasing the risks to your capital. Cryptocurrencies can offer greater inflation protection than traditional fiat currencies (since there is no “central bank” that can print more money, driving down the value of each unit). Cryptocurrencies can also offer very high returns. Over the past decade, crypto markets have skyrocketed in value to nearly $2 trillion – with Bitcoin comprising $550 billion in value in May 2022.
However, crypto prices are very volatile and can also lead to dramatic losses if investors are not careful with their selection and diversification. Investors also need to carefully consider the security of their investments. Whilst many cryptocurrencies are, themselves, quite robust in their algorithms, the repositories that hold and trade them (e.g. wallets and exchanges) may not be completely secure.
Invitation
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