Risk vs reward

IMPORTANT FACTS- Risk v Reward

• When investing your money, the more RISK you take, the better the REWARDS can be.
• However, if you invest your money into riskier things there is a higher chance that you could LOSE your money.
• How you invest your money will depend on the kind of risks you are willing to take. Broadly speaking the risks and rewards associated with each asset class are as follows:

Costs of investing

Charges - depending on what type of investments you make, you will usually incur fees to buy and sell investments. This could be estate agent fees for selling a property or stockbroker fees for buying shares. If you invest through any kind of pooled investment fund then there will usually be a charge for them to manage your investments of a % of the value of your investment.

Tax - various taxes may apply to any money you make from investing. The main ones are:

- Income tax charged on dividends and interest payments

- Capital gains tax from earnings gained through selling shares and property which have increased in value since you bought them (this does not apply to selling your main home)

- Stamp duty, usually paid when buying shares (see here) and properties (see here)

Diversification

• The risks of investing can be reduced, but not eliminated altogether, by diversification.
• Diversification simply means spreading the risk of investing over a range of investments – in other words not putting all your eggs in one basket.
• You should spread your investments out across different types of asset classes (i.e. shares, bonds, property, cash) and across different companies, countries and market sectors.
• You should also try to hold assets whose value changes in different ways to market shocks - for example in times of economic uncertainty share values usually fall but the price of gold usually increases.