Owning a bond is kind of getting an IOU from a government or a company – you buy their bond and you’re lending them money. The dicier the prospect of getting your cash back, the more ‘interest’ they will pay you to compensate for the risk. So an Ecuadorian mining company bond would pay a gazillion times more than the relatively staid UK Government, for example. It’s a riskier loan so they’ll compensate you more for taking this extra risk. That’s the deal.
Bonds are influenced by interest rates so they’re behaving a bit weirdly at the moment. If you lend the UK Government money for 10 years, they’ll pay you about 1.1%. And inflation is about 1.0%. So you’ll see why bonds are feeling a bit “mweh” at the moment.
Shares – also known in noncey finance speak as ‘equities’ or ‘stocks’. If you own shares, you buy little pieces of the world’s biggest companies. And tie your fortunes to theirs. As a rule of thumb, most ‘equity’ funds will have about 50 shares in them, although some fund managers have fewer, sticking to their convictions more about which shares are duds and which ones are winners.
Shares are also one of the few investments where you can get a decent income. Companies often pay out a share of their profits as dividends. They key is to look for an ‘equity income’ fund. Pick the right one and you could get an income of around 3-4%.
Bonds are the man your mother wanted you to marry. Shares are the bad boy your 19 year old self wanted to marry. Exciting, volatile and sometimes painful.
Bond or shares? Many suggest diversification which means a sort-of Combo Meal of bonds and shares. Over the long-term bonds are seen as safer and less choppy than shares but many believe they will make you less over the long-run too. The point is that you buy some units in a fund, someone else picks the stocks or bonds for you, you don’t really have to worry about following the markets, and you also can spread the risk around 50 or so companies. If you buy just a single share, you’re very exposed to that one company’s fortunes and you have to remember to keep track of it and try and work out what’s ahead.
As a rule of thumb, if you’re a spring chicken and investing for ages in the future, you should probably look at mostly shares. If you’re getting on and likely to need your money soon, people typically prefer bonds because they’re less likely to crash as dramatically as shares, leaving you high and dry if you need to cash in your investments. Not putting all your eggs in the basket is the mantra.
UK or global?
Although there’s a documented tendency for us to stay close to home, most people suggest looking overseas too. Spread your bets. Each year, we see a few countries have their moment in the sun. For example, India had a cracking year in 2014. So-called ‘Emerging Markets’ are ‘spicy’. When they’re good, they’re lovely and when they’re bad, they’re horrid. So pick your markets.
Who will tell me which ones are any good?
Most of the platforms we cover on this site have fund shortlists. Playlists, if you will. Fidelity, Hargreaves Lansdown and TD Direct Investing are just some of the main players with research teams who try to filter out the rubbish and whittle it down to more manageable shortlists.
What do funds cost?
Of course investing in a fund is pricier than picking a bunch of investments yourself because you need to pay a fund manager.
Finally, I have most of my money in funds. I just don’t have the time or the discipline to track the stock market in enough detail. Markets might collapse or a share might blow up but if you’re doing the school run or a big presentation at work you can’t put that all on ice to deal with the issue. A fund manager can. The ongoing charge is typically about 0.75%, or £75 each year for every £10,000 invested. And then you have to pay administration, transaction and trading costs on top of that which vary, depending on where you buy this investment. As a general guide it will cost you about 1% – 1.25% all-in to buy and hold a UK equity fund (that’s between £100 and £125 for every £10,000 invested).