Investments offering the potential to grow usually provide higher returns over the longer-term. For example, equity shareholders – whether held directly or through a fund – can participate in future growth in profits and dividends of the underlying companies, both of which can drive an increase in the value of your original investment and help to mitigate the effect of inflation.
However, uncertainty over the future profitability means that share prices of the underlying companies quoted on a stock market may fluctuate significantly as investors adjust their expectations to economic conditions and company developments. In extreme circumstances, an unsuccessful company can become valueless, so investment in equities is considered higher risk.
Returns from fixed interest investments provide a regular and predictable income. The increased certainty offered by this type of investment means they are considered lower risk than equities. However, for longer-term investors, it is important to recognise that the future spending power of income may not keep pace with inflation.
In recent years, the range of investment opportunities has expanded beyond quoted equities and fixed interest. These are often referred to as alternatives and include private equity, various types of property, infrastructure, renewables, commodities and structured products. While the portfolios are able to invest in these type of products, they are unlikely to form a significant portion of the portfolio’s assets.
