Where to Invest

Investors starting out can be confused by the huge range to choose from and may not have the expertise or confidence to discern the most promising individual company shares. Instead many will go for funds run by experienced managers backed up by a team of researchers who will make investment decisions on your behalf. They will also keep a constant eye on how the companies within the fund are performing.

There are thousands of funds to choose from broken down into different types of investments (known as asset classes) ranging from equities to bonds and property to commodities such as oil and gold. These can be divided again into different geographical regions such as the UK, USA or emerging markets as well as different sectors such as technology or infrastructure and varying investment styles including absolute return, special situations and hedge funds.  Banks, brokers and IFAs also put together managed funds based on the level of risk such as cautious or balanced.

These are all actively managed funds or you can buy a tracker fund which will simply follow the movement of an index (such as the FTSE 100). These funds are much cheaper to run and therefore carry lower charges, but may not produce the results seen in actively managed portfolios.

One of the keys to becoming a successful investor is not to hold all your eggs in one basket – spread your money across different asset classes and sectors to give yourself a balanced portfolio. A healthy mix of investments will prevent losses in any one area dragging down your overall portfolio.

For those starting out this is harder to do because you may not have enough money to split between different investment types. In this case you should look at a diversified fund which holds shares in 50 to 150 different companies and if you don't know what sector to go for you could choose a broad-based global fund with a strong track record. Cautious managed funds also tend to be diverse.

Bear in mind that there is never any guarantee you'll make money on your investments and the more risk you take the higher the chance of loss, though the potential gains can be much higher. When selecting funds, look at how it has done in the past compared to similar funds in its sector. The best fund managers usually beat the market over time. This doesn't mean they will continue to outperform the rest - all fund managers go through bad patches –and past performance is no guarantee of future returns as we're always being told.

You need to be prepared to take a long-term view and you could smooth out the ups and downs in the market by investing a regular amount every month into your chosen funds rather than hoping you've picked the right time to put in a lump sum. .

Your overall appetite for risk is crucial when considering where to invest. How badly would you be affected if you lost most of your money on an investment? Near the bottom of the risk ladder are bond funds and UK equity funds. UK equity funds can be unit trusts, investment trusts or Oeics (open-ended investment companies) as well as tracker funds which invest in a range of company shares. Higher risk corporate bonds (often called junk bonds) rank at a similar risk level to shares.

Further up the risk ladder are specialist funds, which give you exposure to certain regions or sectors. Remember, the smaller the focus of the fund, the higher the risk. For instance there has been huge growth in emerging markets over the past decade as well as massive volatility but if you had opted for a fund covering just one country the highs and lows would have been even more marked..

At the top of the risk ladder is investing in single company shares. You can decide to go it alone and buy shares through a stockbroker (many are now based online). Investors here need to be confident, pro-active and prepared to accept they may lose money, though the potential gains are massive. Here, the riskiness of your investments depend on how many companies you are invested in and how big those companies are – smaller companies are riskier than than established blue chip corporations.

Don't forget that the general economic climate is a major factor in deciding where to invest. For instance, equities will perform well in times of prosperity but stocks tend to suffer in a volatile economic environment, while the value of bonds and certain commodities will rise as investors look for a "safe haven". Traditionally "defensive" sectors, like pharmaceuticals and tobacco, tend to remain steady, as will larger companies on the FTSE 100.