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Investing basics

Learn about the main asset classes and the importance of diversification and the principle of risk and return.

Investing in assets

You can choose to invest in a range of funds, which invest in different types of assets, like equities, bonds, or cash. The performance of different asset classes will naturally vary over time. As each asset class has its own unique characteristics, wider market conditions and world events will affect them differently. You may choose to invest your contributions in any or all of the following asset classes.

The main asset classes


There are five main asset classes - watch this video to understand the advantages and disadvantages of each of them.


Different asset classes will affect your savings in different ways. Watch this video to learn about the connection between asset classes and your retirement savings. 


Cash investments include bank or building society accounts, bank deposits and cash funds provided by investment management companies.

Potential benefits

  • Carrying a low level of investment risk, cash offers good diversification opportunities when held alongside riskier assets, such as equities.
  • Quicker and easier access to your money.

Things to consider

  • Inflation can reduce your money's real value.
  • In most cases, growth is very limited.
  • The value of investments can go down as well as up, so you may not get back what you invest.
  • As a general rule, investors include cash in their portfolios in the last few years before they retire, because it can help preserve the value of their savings from a sudden fall in the stock market.
  • These are not cash deposit accounts but invest in money market instruments and short-term bonds and can fall in value.


Bonds are corporate and government loans with you playing the part of the lender, in exchange for receiving interest payments over a set period of time.

Potential benefits

  • Interest is fixed and, as a higher priority for companies than dividends, is paid regularly.
  • Although bonds can go up or down in value, their performance over the long term tends to be much more stable than that of equities.

Things to consider

  • Corporate bonds can be less secure than government bonds.
  • In difficult market conditions, it could be hard to sell holdings in corporate bond funds.
  • Although bonds are considered lower risk than equities, they often have lower returns.
  • There remains a risk that an organisation issuing a bond could fail to make its interest payments or repay the loan. This is one of the reasons that bond funds tend to hold a wide range of bonds from different organisations.
  • Many investors tend to move their money into bonds as they approach retirement, to help preserve the value of their savings.


Also known as stocks and shares, equities represent part ownership of a company. When you buy a share in a company, you’re actually buying a piece of that company, so the investment return you earn depends on the success or failure of the company itself.

Potential benefits

  • Equities often hold the potential for significant growth over long periods.
  • The potential for profit is greater in equities compared to most other asset classes.

Things to consider

  • As an asset class, equities carry the greatest risk in the pursuit of reward. They can prove volatile in the short term, which means they involve more risk than other assets like bonds or cash. For this reason, shares should be seen as a long-term investment.
  • Equities may suit someone who is investing for long-term growth and is willing to accept that the value of their investments could go down as well as up, particularly in the short-term.


Property funds often invest in commercial property rather than the residential market but you should still consider your house and any buy-to-let properties you own as part of your investment portfolio. Property funds benefit from the ability to invest in large commercial projects like shopping centres and retail parks. Fund managers can commit more capital to these properties and deal with fewer landlords than investing in residential schemes, as a result. Property funds also allow investors to invest smaller amounts than would be necessary to buy a physical asset.

Potential benefits

  • You can invest smaller amounts in a fund than would be required to buy a physical property.
  • You can access the commercial property market via a fund, an opportunity not available to most personal investors buying directly into physical property.
  • Funds take away the responsibility of handling property deals and maintenance.
  • Funds that buy properties can also receive rent on the buildings they own.

Things to consider

  • In times of market volatility, property funds may suspend trading so they can manage the selling of assets to meet redemption demand.
  • Changes in currency exchange rates may affect the value of overseas investments.
  • Property prices may fall.
  • Property may suit investors who are likely to be interested in long-term growth, perhaps because they are still a long way from retiring.
  • Funds that invest directly in property can be difficult to sell and the value is generally a matter of opinion rather than fact.


Diversification is essentially the principle of not ‘putting all your eggs in one basket’. In investment terms, this means if you invest all your money into one fund or one type of asset class and it does badly, you could face a big loss. If you spread-out or ‘diversify’ your portfolio across a number of different investments, you’ll be in a better position to withstand any potential losses from a single asset class.


In a fund, your money is pooled with money from many other investors within a fund, so you have more access to more companies or markets than if you were investing directly as an individual.


Investing in a combination of stock markets within different countries, so that your investment won’t depend on the fortunes of just one market, such as the UK.

Asset class

In a mixture of the various types of funds, spreading your money across equities, property, bonds and cash, helping to minimise the impact of a single asset class on your portfolio.

Risk and return

Investment risk to you as an investor is simply that you may not achieve your intended financial goals and there is a risk that you may get back less than you invested.

Read more about risk and return.