How and why do we invest?

Emma Davidson, Affinity Capital founder and director, discusses the motivations behind investing in different asset classes.  

Why do people invest? On the surface, it’s a simple question with a relatively straightforward answer. Essentially, we want to increase our current wealth to ensure adequate provisions are available for our future and the future of our loved ones.

This is not always a simple task, however, and choosing investments that grow at the same rate as inflation – at the very least – can be tricky. According to PwC, the global inflation rate in 2016 was 1.9 per cent, but this is expected to rise to 2.7 per cent this year, which means investments would need to perform above and beyond this level to grow our nest egg.

A typical strategy for most people is to purchase a tangible asset such as property, and then begin putting money into a tax-efficient pension once the home is paid off.

Emma Davidson, explains that this is often where investing gets interesting.

“For the last 100 years, an entire world of investments has been created and sold to us. This is what makes up the financial markets,” she says.

“Broadly speaking, the financial markets fall into two categories: bonds and equities. Or, to put it another way, risk-free assets and risky assets.”

Risk versus returns

An example of a risk-free asset could be a Swiss government bond, which is an incredibly safe investment but it currently pays depositors 0 per cent on their money. Gradually, a 3 per cent inflation rate would erode the individual’s wealth.

Equities is what we invest in when buying company stocks, such as Apple, Samsung or Walmart – all dominant players in their sectors at the moment that can provide healthy returns for investors.

However, in the past, the examples could just as easily have been holdings in businesses like Enron, Blockbuster and Lehman Brothers, which were all successful companies until they collapsed.

“No matter what the company or risky asset is, an investor invests into risky assets because they wish to capture the additional return paid for the extra risk that is taken,” Emma adds.

“It is far riskier to invest into the equity of Apple than it is to invest into a sovereign bond in Switzerland.”

But what if investors want the best of both worlds? Are there investments that offer inflation-busting returns but also offer less risk than traditional equities?

Affinity Capital believes structured investments provide this balance. Would you like to know how?

Please click here to view part two of our ‘Why Structured Investments?’ videos, which explores in more detail why this asset class could be the right choice for many investors.