Financial Conduct Authority’s InvestSmart campaign
InvestSmart aims to help consumers to make better-informed investment decisions and become smarter investors. As it hasn’t received much publicity we felt it would be helpful to give it wider exposure.
The focus of InvestSmart is to help investors identify and access investments that suit their individual circumstances and attitude to risk, providing impartial information on basic investment principles and encouraging a longer-term, more diversified investment approach.
In this note we’re concentrating on the warning to consumers of the risks associated with investing in “high risk, high-return” investments. One of the Financial Conduct Authority’s (FCA) roles is to ensure that consumers are protected by setting standards for financial firms, including Healthy Investment.
They want to help consumers make better informed decisions that suit their financial circumstances and attitude to risk.
We think that there several particularly important points they make that are relevant to Healthy Investment and its policyholders. We give more information through the links to the independent information from the FCA.
Should you invest?
Investing can bring you many benefits, such as helping to give you more financial independence. As savings held in cash will tend to lose value because inflation reduces their buying power over time, investing can help to protect the value of your money as the cost of living rises.
Over the long term, investing can smooth out the effects of weekly market ups and downs. But with the main benefits of investing likely to show over the medium-to-long term, before you are ready to invest it’s worth making sure that your immediate financial circumstances are in the right shape.
Diversification
In the real world, making the perfect decision every time is impossible.
When investing, making your choice from a range of different options reduces your reliance on any particular one working out well. By diversifying, you can dilute the overall effect of any single investment performing badly.
Spreading your investment across different markets reduces overall risks and helps to smooth out returns over the longer term.
There will always be individual instances where diversification might not pay off in the short term but it’s worth noting that spreading your investments across different types of assets can protect you from short-term market swings. It can help you to find the right balance of risks and opportunities, and smooth out returns over time.
Risk and returns
Spreading your money across different types of investments, such as international shares and bonds, can reduce your risks. In a properly diversified set of investments, should any one particular investment or market be performing poorly, the performance of other investments can help to maintain overall returns and mitigate the impact of losses.
It’s important to find the appropriate balance of risk and return when making new investment decisions. If you’re seeking higher returns then you need to be willing to take higher risks with your money. On the other hand, if you’re not prepared to take more risks then you should look at investments aiming for more modest returns.
As diversified investors are less exposed to the peaks and troughs of short-term performance from individual investments, diversification can help to even out investment returns over time.
We are firm believers that the best customer outcomes will be achieved if people can confidently understand the risks of any investment they are considering. As the FCA says, if the current interest rate on a cash ISA is around 1% a year, anything offering above this comes with some risk.
Investments in Healthy Investment’s Ethical ISAs, Investment Bonds and Regular Savings Plans come with some risk to capital but they are classed as “low risk” largely because they invest in a diversified range of investment assets, including government and corporate fixed interest bonds, UK and global stocks and shares and commercial property. As multi asset investments they offer the potential to beat the return on cash deposits without the risk associated with direct stock market investments. Something that may not be possible to achieve as an individual investor.
