What the scientists are saying…

In this series of articles for novice investors, the FCA and The Week tackle the main issues that investors need to be aware of, including how to guard against investment scams

Drinking linked to early dementia Heavy drinkers have a substantially increased risk of developing early-onset dementia, a study has found. Researchers in Paris examined data on millions of adults discharged from French hospitals between 2008 and 2013 – a cohort that included 1.1 million dementia sufferers. They discovered that patients with dementia were three times more likely to have been hospitalised with alcohol dependency, or with a condition related to chronic heavy drinking, than other patients. And when they looked specifically at early-onset dementia, the correlation was yet more marked: 57% of the 57,353 patients diagnosed with dementia before 65 were heavy drinkers according to the study, published in The Lancet. Heavy drinking is associated with other risk factors for dementia – such as smoking and depression – making it hard to pinpoint the role it’s playing. However, alcohol clearly does damage the brain, and Dr Michaël Schwarzinger, the study’s leader, said it’s likely that it has a “much larger” role in dementia than previously believed. He believes it should be classed as a “major risk factor” for the condition.

Children’s voices are “gendered” The voices of prepubescent girls and boys are identifiably different, although their vocal cords are the same. A team from the University of Minnesota made recordings of nearly 100 children, aged between five and 13, speaking, and then played them back to a panel of adults, who were asked to rate each voice according to its perceived masculinity or femininity, on a six-point scale. On average, the boys’ and girls’ speech was rated one point apart, suggesting that from a very young age, children identify with and emulate adults of their own gender. Further analysis of the recordings showed that boys tend to speak at a lower pitch than girls, and to enunciate the letter “s” less clearly, reports The Times – a trait that is equally true of adult men in Western cultures (in some other cultures, women enunciate it more clearly). However, the voices of boys with gender dysphoria were rated as more feminine; the difference on the scale was about a third of a point in their case. According to Professor Ben Munson, who led the research, those who are confused about their gender tend to have “a sort of hyper-correct ‘s’ that is more characteristic of the gay speech style in adults”.

Battle of the diets To lose weight should you cut out the carbs, or the fat? It is one of the great battlegrounds of the diet industry – but according to the latest research, they are equally effective, provided you eat the right type of food. For a study at the University of Stanford, California, 609 overweight people all underwent genetic testing before being asked to follow either a low-fat or low-carbohydrate diet. In both cases, they were urged to cut down on added sugar and refined grains, and eat plenty of vegetables. Over the next year, the participants in each group lost, on average, 5kg to 6kg, suggesting that either diet can work, providing people stick to it, consume less overall and eat healthily. They could also identify no genetic reason why some people might find one or other diet more effective. Separately, researchers from Britain’s Office for National Statistics found that people wildly underestimate how much they eat. Using a “gold standard” technique to measure energy expenditure, in which participants drink water containing trackable isotopes of hydrogen and oxygen, the team compared what 200 participants in the National Diet and Nutrition Survey reported about their diets with their actual intakes – and discovered that, on average, they consumed 50% more calories than reported.

Clean hair equals dirty air When people worry about particulate pollution, they tend to assume that traffic fumes are the main source of the problem. In fact, common household products may do even more damage. An analysis of air pollution in Los Angeles, published in the journal Science, has found that up to half of all volatile organic compounds (VOCS) in the city’s air come from domestic goods, such as shampoos, deodorants, paints, bleaches and perfumes. VOCS have been linked to a number of health problems, from asthma to heart attacks, and are implicated in 29,000 premature deaths in the UK each year.

If you’re thinking of investing, be it for retirement or simply to try to make your savings work more efficiently for you, there are several things you will need to think about.

Am I ready to invest?

There are risks attached to all investments, and it’s important to be aware of them before committing your money.

If you’ve decided to make investments, it is important to establish first how much you can afford to invest. Questions to consider include: what is your personal situation in terms of debt? For example, if you have any debt with a high interest rate, the expected growth on investments may be outweighed by this level of interest.

What financial arrangements have you made for retirement?

What protection do you have in place in the event of an unforeseen event (such as critical illness, job loss or even premature death)?

You’ll also need to consider how much appetite you have for risk. Investments can go down as well as up, so you need to think about how much you can afford to lose, as well as how much you might gain.

Diversification

Your individual appetite for risk, the amount you can afford to lose and the time frame you wish to invest for are just some of the crucial factors in determining which investment is appropriate for you.

It’s also important to remember that investing in just one area can increase the risk you are taking.

For example, you may wish to invest in a company with which you are familiar. However, putting all of your eggs in one basket could lead to substantial losses if that particular company develops issues.

That’s where diversification comes in - the practice of holding a range of investments across a number of sectors, asset types or companies. By spreading your money, you lower the risk to your overall portfolio, by reducing the risk of all your investments falling in value at the same time.

To give a simple example, imagine you invest in an umbrella company and an ice-cream company. If the weather is rainy, the umbrella company will do well; and if it’s sunny, the ice-cream company will benefit. By investing in both companies, your pot as a whole is less vulnerable to fluctuations in the weather.

Diversifying isn’t a simple matter. As stated, your portfolio of investments should be based on your financial goals, the time you wish to invest for, your appetite for risk, how much you can afford to lose, and many other things. As a result, your portfolio might be completely different to those of, say, family members or friends.

For example, your portfolio might contain things such as UK shares, whereas that of someone with different needs and goals might contain things such as US shares and property.

Funds

A fund is a bundle of shares, bonds or other assets selected by a fund manager. Bonds are fixed-interest securities offered as a way for companies or the UK government to raise money, by borrowing from investors.

One of the main benefits of a fund is that you invest in a diverse portfolio of assets (often with shares in 40 or 50 different companies, in a shares-focused fund), without having to choose and buy those shares yourself.

Funds that invest in shares and bonds are also usually quite liquid, meaning you can usually buy or sell units in the fund quickly whenever you want.

The fund manager will charge a fee for their service, often in the form of a percentage of the value of the fund - so whatever fee they charge will affect any returns you make on your investments. Remember, the fees will usually come out regardless of how well or badly the underlying investments perform.

Each fund will have an investment aim. This might be very wide-ranging (for example, to invest in shares in large companies in the world’s major markets), or more focused (for example, to hold shares in small Uk-based companies). In many cases, the fund manager chooses which shares or other assets to hold and in what proportions: these are called actively managed funds.

Other funds, known as passive funds, track market benchmarks such as the FTSE 100 Index. This means that your investment rises and falls in line with the index. Passive funds typically charge lower fees than actively managed funds.

Buying a fund, rather than individual shares, will go a long way towards diversifying your portfolio, but there is more you can do. Funds will often invest in particular areas of the market, as mentioned. This means that if something happens that affects an entire market, you could see all or most of the shares in a fund fall at the same time.

You can protect against this by diversifying even further, across several funds covering different geographical regions and company types, rather than holding all your money in a single one. This doesn’t alleviate all the risk of investing but, hopefully, it should insulate you against short sharp shocks.

You might also diversify across different types of assets, including shares, corporate bonds, government bonds and possibly property. By holding a diverse selection of assets, you are likely to be better protected from market shocks.

Scams

There are some types of investments that are not regulated by the Financial Conduct Authority (FCA). If they are not regulated, you won’t have access to the Financial Services Compensation Scheme (FSCS), nor to the Financial Ombudsman Service (FOS) should you wish to make a complaint or in the event of a firm going bust. You can check the FCA Warning List for explanations of the risks involved with different types of investment, and to find out whether a product is regulated or not.

Never listen to any offers of financial advice or investment opportunities presented by people who contact you out of the blue. After all, if an investment is so great, why are the salespeople resorting to cold-calling strangers? The chances are that any offer they make will be a scam.

Many fraudsters will include an element of time pressure in their offers, along the lines of: “This opportunity won’t be around forever and only those who get in quick will reap the best rewards.” They may warn against telling anyone else about the deal, perhaps saying the offer only stands on condition of confidentiality. Above-board investments will never have a condition of secrecy and very rarely come with time pressures.

Don’t underestimate how cunning these scammers can be. Some purveyors of dodgy investments will be equipped with answers to all your questions and arguments, including why your financial adviser might steer you away from what they’re selling. The best thing to do is simply not engage.

Consider paying for the services of a financial adviser: the Money Advice Service website has information on how to find a reputable one. You can also get further information from a group that represents advisers, such as the Personal Investment Management and Financial Advice Association (PIMFA). If you do

employ an adviser, use the FCA’S Financial Services Register to check they are authorised.

So do your research: look into the different types of investment options and think about how much risk you can afford to take. Speak to an FCAauthorised financial adviser if you want expert help, and visit www.fca.org.uk/

scamsmart to find out how to protect yourself from scams.