Unfortunately, the chances of this happening are extremely slim and the risks all too high. Putting all your investment eggs in just one basket is a risk very few people can afford to take.
Successful investing is not about taking big risks but balancing risk and return by investing in a broad portfolio of cash, bonds, property and cash.
Cash is king
Your attitude to risk
Don’t forget property
Buying shares
The starting point for every investor is to make sure you have enough money tucked away safely for emergencies. The best place for this money is in a deposit account with a bank or building society where you can get to your cash quickly.
The amount of rainy day money you need depends on whatever makes your comfortable but most experts say you should put away between three and six months salary.
Your next step should be to decide what type of investor you are. This is crucial as it will determine the type of investments that will suit you. Investment experts tend to put investors in one of three categories: cautious, balanced or adventurous.
Deciding which category you are in depends on how much risk you are happy taking but there are some guidelines to help you. If you are a young investor you can afford to be more adventurous with your investments in the hope of getting better returns as you have longer to replace any money you lose. You can also be adventurous if you are wealthy and have plenty of money in other assets.
Balanced investors tend to be those who are slightly older, perhaps with families or who are prepared to take a little risk to get a better return.
If you want to ensure your capital is completely safe you are a cautious investor and should think carefully about whether investing in shares is for you. This is particularly important for people in or near retirement who would suffer a decline in living standards if they were to lose money.
You also need to consider whether you want income or growth from your investments, why you are saving and when you need to access your investment. All these factors will influence how much you can afford to put into shares. If, for example, you are saving for your retirement in 30 years you can afford to take more risk than someone who is saving to buy a house in three years.
Broadly speaking, you should think carefully about investing in shares unless you can afford to leave it untouched for at least five years. It would be great if your investment were to rocket in value in just one year but shares can be volatile, suffering falls as well as gains. The longer you leave your investment untouched, the greater chance you are giving it to grow – like a fine wine, shares can take time to reach their best.
Once you have decided what type of investor you are, you can start allocating your investments. Corporate bonds should play an important part in your portfolio. Like shares, bonds are issued by companies but are a different type of investment. Rather than linking your returns to the company’s profits, corporate bonds pay a fixed amount of interest, known as the yield, and provide little capital growth.
This makes them very popular with investors who need income but even younger investors should have some bonds in their portfolio as they tend to be less volatile than shares. This makes them something of a safe haven investment and will provide some security in your portfolio.
The amount of money you put in bonds depends again on your attitude to risk. But as a rough guide, most experts suggest you should have the same amount of bonds in your portfolio as your age. So, if you are 40 you should have around 40% of your portfolio in bonds. Remember though, this is a very rough guide and the amount you should have will depend on your personal circumstances. Learn more about Investing in bonds.
You should also try to have some property in your portfolio. If you are a homeowner you already have this covered but if not, think about putting a small portion, say 5% to 10% of your portfolio, in a property fund. Property funds do not invest in houses but commercial property such as factories and offices so you might want to get some exposure here even if you are a homeowner.
The remainder of your portfolio can go into shares. The most important thing to remember about investing in shares is diversification. If you invest in a small number of shares the risk of you losing money is greater so you need to invest widely in different types of company and different countries.
If you only have a small sum to invest the best way to do this is to put your money in an investment fund. Funds, which pool the investments of a number of investors, are a good bet because they employ professionals to invest your money in a variety of shares, usually more than 50.
They also enable you to access markets where it is difficult to buy shares directly, such as the Far East and Japan. You can also use ETFs and covered warrants to access markets. Learn more about Investing in funds and Investing in other stock market instruments.
If you have a larger sum to invest you can look at buying individual shares. Buying shares can be enjoyable and profitable but you need to invest time in picking the right shares and areas to invest in, monitoring your investments and, choosing the right time to sell. Read more information on how to manage your portfolio, including how to choose, monitor and sell shares.