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“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”. – George Soros

There are four main asset classes that can be used to build up an investment or pension fund, and these are:

  • Cash
  • Fixed Interest
  • Property
  • Equities

Cash benefits from a lack of volatility, but returns are generally expected to be lower over the medium term than other asset classes.  Fixed interest refers to either Gilts or Corporate Bonds and is expected to produce higher returns over the medium term than cash, but with some risk.  Property encompasses both residential and commercial, but the majority of property funds focus on the latter.  Until mid 2007, property funds had enjoyed a sustained period of attractive returns, but have since experienced huge volatility and reductions to fund values.  Equities are the most volatile of these asset classes, but are also expected to produce the highest returns over the medium term.  There are many different types of equity fund, both geographically and in terms of the type of equities invested in.

In addition to these asset classes there are also more esoteric investments such as derivatives and commodities that have had an increasing role in investment and pension planning over recent years.

What investment returns can be expected from the different asset classes?  The chart below provides an estimate (based on an assumption that inflation will be 2.25% and before tax):

  • Cash – 4.75%
  • Gilts – 5.25%
  • Investment Grade Corporate Bonds – 5.8%
  • Property – 7.5%
  • UK Equities – 8.25%
  • Alternative Assets – 10%

Source:  Prudential
NB:  Past performance is not a guarantee of future returns, and investment values can fall as well as rise.

It is therefore important that an investment or pension is structured in the right way, and there can be a number of factors that determine the most appropriate structure.  These include:

  • Attitude towards investment risk
  • Age
  • Length of investment period
  • Whether investment is for growth or income
  • Amount of money invested
  • Other assets and capital available

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