Where do I invest? Many people do, I know, glance at or read or study in depth, the ‘Your Money’ sections of the papers, particularly the weekend press. One of the often-repeated stories, which has caused both confusion and concern among many I’ve seen in recent weeks, is ‘Bonds vs Equities’. Should you be investing in one or the other? And, for many clients, the question is, where are they invested at the moment? Here’s the gist of it. By ‘Bonds’, we mean ‘Fixed Interest Securities. By ‘Fixed Interest Securities’, we mean loans, either to governments or companies. In return for a loan of, say £10,000, the government, or, let’s say, BP, gives out a piece of paper which says they’ll pay interest each year, and give your money back at the end of the term of the loan, which might be 5 years, 10 years or longer. Those pieces of paper can then be bought and sold on the stock market. If the interest that BP will pay is 3%, and you could get more than this in the bank, that piece of paper will be worth less. And vice verse. And if you think BP (or a government, say Spain) might not be able to repay their debt, it will also be worth less. These Bonds are generally more secure than shares, because they have an ‘end date’, and they pay a fixed amount of income, rather than a dividend based on profits. So when share prices go down, investors (the big institutions, which affect markets) buy bonds, and their price goes up. Now shares are doing will, the opposite is happening. Those big investors are buying shares and selling bonds, and that’s making the value of Bonds go down. If you’re a ‘Low Risk’ investor, financial advisers, us included, will have recommended that you invest in funds which have more in bonds than in shares. So should you be worried, and should you be either cashing in or moving to shares? I’d say, not unless you’re now happy to take more risks. Shares will, generally, go up more, and, as what goes up will go down, also down more. Over the long term, there are usually more ups than downs, which is why you invest in the first place. And remember, when shares go down, the bonds give you that ‘cushion’ against the big falls. Bonds also pay an income, and that continues to be paid even if the face value goes down. Remember the analogy of letting a house. If you bought a property in 2007, it might still be worth less now than it was then. However, if you have good tenants, you’ll still be getting an income, so, unless you have to sell, it doesn’t matter. Most of you will have a mix of shares and bonds, based on the level of risk with which you’re comfortable, and enough cash for emergencies. So, once again, don’t panic, Captain Mainwaring.
Posted on: Sun, 25 Aug 2013 07:58:10 +0000
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