When selecting medium-to-long-term investment vehicles, we like to keep things simple. We avoid un-regulated investments and mainly use Stocks and Shares ISAs, Collectives, Personal Pensions and Investment Bonds. In certain circumstances, for example Inheritance tax planning, we may consider alternatives. Whichever vehicle is best for you, we believe you need to invest into the equity markets if you wish your investments to keep pace with or even outperform inflation, the greatest destroyer of purchasing power.
Investing for the future normally means accepting some level of risk. Most people get confused with risk and end up making the wrong decisions. There are many, many definitions of risk but for simplicity, we consider the 3 main risks as volatility risk, inflation risk and risk of capital loss.
By leaving your money in cash or fixed-income investments, you risk the value of your money not keeping in line with inflation i.e. losing its purchasing power.
By investing in single company shares, you increase your risk of capital loss.
However by investing in the great companies of the world, which make real things and sell them to real people, you increase your chances of achieving long-term, above-inflation returns. However the price you pay for this is short-term volatility i.e. fluctuating share prices. You need to be accepting of this.
As people are prone to panic when a portfolio heavily weighted to equities drops, they reduce their exposure to volatility risk by adding perceived, lower-risk assets such as fixed income. Whilst it can add balance to a portfolio, having too much in fixed income is akin to driving with the hand-brake on. It stops you getting the full potential of the markets.