Video: What is investing?

Let's talk about investing

Helen:

Hi, I'm Helen and I work for OneFamily alongside the teams that talk to our customers.

And there's a lot of questions that they often ask us. So today I am joined by Altaf Kassam from State Street Global Advisors and he's an investment strategist. Welcome Altaf, it's really lovely to have you.

Altaf:

Thank you for having me.

Helen:

Thank you.

So firstly, would you be able to tell us what State Street Global Advisors actually do?

Altaf:

So, State Street Global Advisors, or SSGA, is an investment management company based in Boston. We're one of the largest investment managers in the world and we manage money for clients all over the world.

We're really proud to work for OneFamily. And what that means for OneFamily and its customers is that if you invest in a OneFamily account like an ISA or a Lifetime ISA, then the money actually goes through into a fund which is managed by SSGA, which is invested in the financial markets. And we'll talk about that a bit later.

So, OneFamily manage the product or the account and SSGA manage the fund behind it.

Helen:

Great. Okay, so the burning question, what actually is investing and what happens to the money that's paid into One Family ISA, for example?

Altaf:

So, I'm glad you asked me that. It's a big question, but hopefully the answer is simple.

Effectively, when you put your money into, for example, your OneFamily ISA, it gets invested along with lots of other people's money into the financial markets directly through a fund, which as I said, is managed by SSGA.

Now the financial markets contain all sorts of investments, but we try to focus on a couple, which are equities or shares and fixed income or bonds.

Now shares, as the name suggests, give you a share of ownership of a company. And with that share of ownership, you can participate in the ups and downs. So if the value of the company goes up, your share price should go up as well.

Fixed income or bonds are like a loan or an IOU. You lend money to a company or a government, and you hope that at the end of that term of that loan, you get at least your money back, plus some interest that you've earned along the way.

Now all investments involve risk. Some are more risky than others. For example, shares are going to be more risky in the same company than bonds of the same company. That's because you've got more upside potential in shares, but also more risk on the downside as well.

So, what you hope is that when you come to sell your investment, your fund has gone up in value because it's earned investment returns from the investments that it's invested in. And that will get you back more than you put in, even after you account for fees.

Helen:

Okay, so how do world events affect investments? So, for example, the war in the Ukraine, that affected our customers' accounts. So why does this happen?

Altaf:

Well, like I said, all investment involves risk. You can't make risk go away. You can try and smooth out some of that risk by diversifying, by investing across lots of different countries, lots of different industries, by mixing shares and bonds. But there's always going to be some risk in there.

And when you do invest, what the financial markets are trying to do, what investors are trying to do, is predict how companies or government economies are going to behave in the future.

And if something unexpected happens, like a war or a pandemic, those forecasts for how that company or that economy is going to do change very quickly. And that makes prices move up and down very quickly. We call that volatility.

And as I said, on the whole, shares of the same company are more volatile than bonds of the same company. They have more risk. But they also should give you more return over the longer term.

So, it's easy to get focused on those short-term moves, but what we really care about is investing over the longer term.

Helen:

So in the news lately, there's been a lot about interest rates. But why would someone choose a stocks and shares account over a product that accrues interest?

Altaf:

Right, so it's definitely true that interest rates in the UK are about as high as they've been in the last 15 years. That's good for savers, but bad, for example, for people who are looking for a mortgage.

But it does mean that if you're looking to invest somewhere, but you haven't made your mind up while you're waiting, while you're trying to decide putting your money in a savings account does actually make sense for the short term.

The problem is that if you leave your money in that savings account over the longer term.

And then you have to think about the reason why interest rates are high. And they've gone up because the Bank of England is trying to control inflation by raising interest rates. And it's that inflation that really eats away at the returns of your savings if you just keep them in a bank account.

And basically what's happening is inflation tries to measure the rate at which prices are going up. And if prices keep going up, they can go up more than the interest that you earn on your savings. And that can mean that your spending power is actually reduced.

So, what we call the real return, or the return that you get after inflation, can be much lower than you think, or even negative.

What we do find though is that if you invest in shares, you tend to at least keep pace with the rate of inflation.

And if you invest for the longer term, by which we mean five years or more, you generally, history shows us, tend to make more than the rate of inflation. Your spending power can actually go up.

It actually works even better the longer you invest. But in general, shares are the investment that can actually preserve your spending power more than, for example, keeping your money in the bank.

Helen:

Okay, so it sounds like there are a lot of things that affect your investments, but you want to make as much money as the prices have gone up. So that might mean that you'd want to invest in stocks and shares maybe more than an account that accrues interest.

Well, thank you so much, Altaf. Really appreciate you coming in. And it's been really illuminating to find out a little bit more about investments.

Altaf:

Thank you for having me.