|You now know some of the basics
of investment. So what do you invest in?
Here's what you know:
- You know what is meant by the 'return' on
an asset. You are looking for high returns.
- You know that the returns on assets are subject
to uncertainty (or risk). You want to reduce risk.
- You suspect that high returns are incompatible
with low risk.
- You know that liquidity has value.
- You know that inflation is a special sort of risk.
- You know that diversification reduces risk.
So 'lots of different assets' is better than 'a few assets'.
How do you balance all these factors to decide
where to put your money?
Chose asset classes first
What you do not do is
try to decide which high interest account to open or which unit
trust to buy. This is putting the cart before the horse. First you
must choose between groups of assets.
The reason for this, which you will have to take on
trust for the moment, is that the fundamental investment decision
is to find the right balance of risk and reward that suits your
own personal preferences. The way to get this decision right is
to cut down on the number of choices by grouping assets with similar
risk/reward characteristics together.
of similar assets are called 'asset classes'. You
will end up with a number of different asset classes. So you chose
between those classes.
What asset classes?
We devote one section of this site to assets and describe the most
important classes there. There are nine of them. There might have
been many more, but choosing the right mix just from the nine is
a pretty daunting task, is it not?
Here's the key, which unlocks the whole process. For
simple investing you should start by considering only two asset
classes: cash and shares. The reasons for this are complicated.
You should take it on trust for now. If you are sceptical, the explanation
will emerge through the advanced sections of this site.
You may want to know what shares
are. There are lots of different ways of investing in shares (or
'equities') but that does not matter, yet.