Monday, 01 December 2014 00:00

Investments - understanding the jargon!

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Spending all of our time advising clients in relation to their investments and pensions, researching markets and investment propositions, and meeting fund managers and investments specialists comes with a significant occupational hazard, and that is the use of jargon. So first of all, our apologies if you have been on the receiving end of any jargon from us! We’re now going to put that right by explaining some of the main terms that we commonly use in relation to investment markets and products,to ensure we all have the same understanding of them.

Asset Classes

This is a term that is used to describe the different types of underlying investment funds that make up a typical investment portfolio. The most popular asset classes include the following;

  • Shares or Equity: Equity funds buy a fraction of the ownership of a range of companies. These shares (to denote a ‘share’ in the ownership) are typically traded on a stock exchange.
  • Bonds: Companies or governments issue these, where they effectively borrow money from investors in return for an agreed rate of return over an agreed period of time.
  • Cash:In a cash fund, the manager places money on deposit with a bank, sometimes across a range of varying maturity dates.
  • Property: This is where an investment fund (usually) buys a number of properties and the performance of the fund is dependant on the rise or fall of the value of these properties and the income they produce from rent.
  • High Yield funds: This is another type of equity fund that is made up solely of shares in companies that have a common characteristic –a history of having paid and/or an expectation of higher than normal levels of dividends in the future.
  • Absolute Return funds: These are funds that use complex investment instruments such as options and derivatives to invest in a range of asset classes. By using these instruments and investment methods, they can produce positive investment returns in both rising and falling markets. This approach is utilised widely by hedge funds.

Most investors don’t want to “bet the house” on the performance of a single asset class or worse still, the performance of a single share price. As a result, at Cregan Kelly O’Brien Financial Planning, we usually recommend a diversified portfolio to investors. Rather than having all your eggs in one basket, this approach spreads the investment amount over a number of asset classes, and within each asset class over a number of underlying investments. The aim is that if one company / sector / region / asset class underperforms; the whole investment is not significantly affected. People in Ireland who had a significant amount of their investments tied up in property over the last decade probably rued not having a more diversified portfolio.

Portfolio Management Strategies

Active management is where a fund manager makes investment decisions in relation to investment assets with a view to out performing an investment benchmark or peer group. In this strategy, they use their knowledge and expertise in relation to stock (or other asset) picking and market timing with the aim of beating their competitors.

Passive management on the other hand removes this need to get timing and stock picking right. Instead the investment fund simply mirrors the investment make-up of a benchmark index, in order to produce similar performance to the benchmark and achieve average returns. This reduces the risk of out-performance or underperformance against the benchmark.

Investment Styles

Value Investing is where the fund manager seeks to buy shares or other securities that appear to be under-priced or “cheap” when they examine the shares using their investment analysis tools. The world’s most famous investor, Warren Buffett has long been a proponent of this investment style.

Growth investing on the other hand is where fund managers invest in companies where they expect significant growth in the share price, even where the share price may look expensive using their investment analysis tools. This investment style fell out of favour somewhat after the dot-com bubble burst, where the expected growth of companies never materialised.

This is just a snapshot of some of the terms used by Cregan Kelly O’Brien Financial Planning in discussing investments with clients. There are of course many more, and please never be afraid to ask us to slow down and explain them fully to you!

However it is of course one thing understanding the terms, another altogether knowing which is the right approach for you. But that is where our expertise comes in, understanding your specific investment objectives, determining your appetite and attitude in relation to taking risk and then guiding you towards the best investment solutions to fit your own requirements. You just can’t beat good, impartial advice!

If there are any other terms that you would like explained, please let us know and we’ll reply with an explanation.

Last modified on Tuesday, 02 June 2015 21:25
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About Cregan Kelly O'Brien

 

In 2007 Maurice Cregan and Colm Kelly established CK Financial Services to provide independent financial planning and advice to business owners and individuals. Tommy O'Brien, a General Insurance expert, then joined them in 2010, enabling them to meet the full financial needs of their clients. Financial Life & Planning Limited would deliver Financial Services, and O'Brien Cregan Kelly Insurances would deliver Insurance Broking services. Two Business Names were registered Cregan Kelly O'Brien Financial Planning and Cregan Kelly O'Brien Insurances

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