Key Takeaways

• An overwhelming amount of investments available.
• Various asset classes have different levels of expected return and risk.
• Being flexible by understanding them all and using each when required.

As a resident of the UK, choosing to invest using an ISA is an easy decision due to their tax benefits. But then when it comes to choosing investments, the shear number available and the different types start to make it much harder.

I have a Stock & Shares ISA with Barclays, a bank I’ve been with since a child. A quick search on the platform gives 120 bonds to invest in, 4,200 stocks, 2,500 funds, 200 Investment trusts, 1,400 ETFs… That is a lot of choice.

These are various asset classes that act in different ways and have different amounts of expected return and risk. So what should I invest in?

Bonds

Bonds are another name for a loan but acting as the lender in this case. Money is lent, interest is received whilst the money is lent, then the money should be returned in full when the bond expires. The level of risk for bonds is shown by the interest rate, or total return, they offer. Bonds considered higher risk have a higher rate of return.

Bonds available to invest in are issued by companies or the Government. Government bonds, known as gilts in the UK, are considered the least risky investment overall. They are considered ‘risk free’ as money can be printed to pay them off if necessary, hence create a base minimum level of return that other investments can be compared against.

Bonds issued by companies are more risky than the Governments gilts as companies can fail to repay them, so they have higher rates of interest. Although for low risk established businesses, the interest rate may be similar to the gilts because they are very likely to be repaid.

Although bonds, including the ‘risk free’ gilts, are considered low risk and you are very likely to get your money back from them in the future, it doesn’t mean they can’t drop in value in the meantime. This has been the case in the last few years moving from a period of low to higher interest rates.

For a real life example, the TG61 0.5% 2061 gilt was issued at the start of Covid in May 2020 at a price of 100p. It will pay out 0.5p (0.5%) each year until October 2061 where it will be paid back at 100p. It is currently priced at 25p in 2025 and yields 2%.

This is due to new bonds being issued at between 4 and 5% interest/returns to get close to the current base rate, the price of existing bonds moves to match the returns currently on offer. For TG61, this means its price has dropped 75% since being issued, but by 2061 it will return to 100p when it is repaid in full.

Anyone who bought these previously are likely holding them at a loss at the moment, and will likely be this way until interest rates drop meaningfully. Pensions typically hold gilts and at higher portions the closer to retirement, this is a major reason pension pots dropped in value since Covid.

Stocks

Stocks are the most well known asset class because they make the headlines and most of the largest, most recognisable companies are publicly listed on the stock exchanges around the world. A stock is an ownership of a small piece of a company, which many people ignore, rather than just a number on a screen that jumps about.

Stocks are grouped together within indices (FTSE 100, S&P 500) that have provided long term returns of 7-10% on average. However that is an average of all the stocks on the indices; on an individual stock level some return more, some return less and some become worthless if the company goes bankrupt. The year by year return of both indices and individual stocks is volatile, and can be negative. The returns of individual stocks is normally even more volatile, so considered more risky the fewer that are held.

Stocks provide a return through dividends and/or stock price growth. The stock price is determined by what people (the market) believe it to be worth, where the upside is effectively unlimited if the company grows to become very valuable.

Stocks can act very differently from each other depending what industries their in and what opportunities are available to them. Growth stocks typically pay small dividends totaling between zero and ¼ of their earnings, directing the remaining earnings to fund the growth by expanding the company.

For other companies with a lack of growth opportunities, the dividends can represent ½ to all of the earnings each year. As zero or minimal remaining earnings are directed to expanding the company, they tend to grow much slower. These are all generalisations and companies do exist that break these norms in both good and bad ways.

Funds

A fund is a pool of money that a fund manager uses to invest in stocks. It’s effectively outsourcing the management of the money to a professional manager. These managers receive my money and invest it in line with their strategy. This also means if I take my money out, the manager will have to sell investments to make the money available. This obviously impacts their decision making.

All income has to be passed onto the investors, apart from the management fee charged. Funds based in the UK do invest in companies from other countries.

ETFs

Exchange Traded Funds are similar to funds above, but aren’t actively managed by a professional manager. The ETFs are set up and designed to automatically track the investments held within them. These are typically stock indices like the FTSE 100 or S&P 500, or certain sectors of the indices e.g. banks, technology or energy.

As no one actively manages them, the costs are very low and typically outperform the average fund after costs are considered. Investing using ETFs is what Warren Buffett says is the best option for the vast majority of people, they will get decent returns without needing to have much knowledge of or spending time on investing.

Investment Trusts

Investments Trusts are similar to funds but have key differences. They are managed by professional managers who select stocks to hold, but my investment buys a small piece of the trust from another previous investor (similar to a stock). The money doesn’t get given directly to invest and the manager doesn’t have to match investments with money inflow/outflow.

As the money doesn’t go directly into investments, the value of the fund is determined by people/the market so the trusts value can diverge from the actual value of it’s holdings. The trusts calculate the Net Asset Value (NAV) to show the value of their investments at that point.

Investment Trusts are able to borrow to invest as well. This gives them potential for higher returns but also larger losses, so increases the risk.

REITs

Real Estate Investment Trusts, or REITs, aren’t as well known as other forms of investments but are a specific type of Investment Trust. Effectively they are a company that own various forms of property that generate an income, mainly through rent. The income is paid out to the investor in the form of dividends. Appreciation, or depreciation, in the value of the property is calculated for its overall value as well.

REITs exist for a range of property that includes residential property, student accommodation, warehouses, self storage, retail and shopping malls, wind and solar farms, offices and medical facilities. The list goes on.

Each sector performs differently depending on what is going on in the economy. For example in 2022 office REITs were decreasing in price due to the increase in working from home due to Covid and the reduced need for office space. Whereas, renewable energy REITs were increasing due to the increased energy costs due to inflation and the Russian invasion of Ukraine.

To be classified as a REIT, they have to pay out at least 90% of earnings as dividends to investors. This means they don’t tend to grow much each year (1-3%) but the dividends are typically 6-9% per year. Some do exist that reverse these numbers.

Also, like other investments, higher interest rate like we continue to experience in 2025 cause the REIT value to drop. REITs make this easy to see by the way their Net Asset Value (NAV) is calculated and shown regularly alongside their actual share price.

What I do?

For investments, my interests and focus lies with stocks and REITs listed in the UK on the London Stock Exchange. These two asset classes have superior returns when compared with others like bonds, and the time I spend researching into individual companies should help reduce the potential downside risk they carry. This is what the most successful investors do, effectively cherry picking individual stocks to create their own portfolio that they believe will outperform the general indices and benchmarks.

I’m looking to hold investments for 40-50 years, well into retirement. This is more than long enough to ride out the ups and downs of the stock markets, there will likely be numerous stock market crashes and recoveries over that time. Rather than crashes, they should be viewed as opportunities to buy on sale. This doesn’t mean I ignore other asset classes, it’s worth understanding them and always being on the lookout for opportunities.

There are times when I need certainty my money or a portion of it will be available at a point in the future. Obviously I could just keep it in cash, but inflation will erode its value away over time. It is possible to invest it in certain bonds that have returns that will basically match inflation, so it will grow to maintain its value, but nothing more. That is better than holding it in cash if I need the certainty.