Financial investment jargon can be a real deterrent for consumers who want to invest their money wisely. They are also often too embarrassed to ask for an explanation and therefore either invest blindly or choose not to invest because they are unsure of what they are doing.
Equities, also known as stocks or shares, are what many investors first think about when it comes to investing, Wilson says. “When investors buy shares, they effectively become a part owner of that company, a shareholder. The reason stocks and shares are synonymous with equities is because owning a share of a particular company means you own equity in that company.”
She warns that along with their higher growth prospects, equities typically carry higher volatility in the short term in comparison to more stable assets such as cash and bonds.Bonds are usually described as loans to institutions, such as governments and companies, that need to raise capital to fund projects or initiatives, Wilson explains. “As a bond investor, you give your money to the government or company that issued the bond for an agreed period of time.
Wilson says bonds are typically used in investment portfolios to provide income and reduce overall portfolio risk when combined with equities.Diversification is an important investment strategy that spreads investment funds among different assets that are less correlated with each other, Wilson says. This approach helps to reduce risk while maximising return.
Wilson says this is an example of diversifying assets within a single asset class, namely equities. “A manager of a multi-asset portfolio will diversify even further by combining several different local and offshore asset classes, such as equities, bonds, money market and property in an investment portfolio.”
What level of return do you want to achieve? Do you want to achieve a return in line with inflation to preserve the purchasing power of your investment, or do you want to grow your wealth by achieving above-inflation returns? This chart shows the asset allocation of a conservative portfolio, for an investor who has a shorter 3-year time horizon. The portfolio is made up predominantly of South African Bonds and Cash :