There are many reasons to start investing. It could be to accumulate enough money for a deposit on a home, or to build a pot to help with expenses for children. The growth of the “gig economy” may mean fewer of us will be in a job or career for life.
Rising longevity – coupled with less generous state and company pensions – make it likely that more financial resources will be needed later in life. And many Brits face a pension shortfall, with the average retirement pot just £43,000, according to the Association of British Insurers. The sooner you start investing, the more likely you will be to benefit. But, while many of us might enjoy a small flutter at the races, no sensible person wants to gamble with their hard-earned savings. So when you do decide to begin investing, it’s key to know the difference between a carefully planned policy and an each way punt on the 4.30 at Haydock.
Managing riskBeginners should understand there is no such thing as “risk-free” investment. Click To Tweet
Beginners should understand there is no such thing as “risk-free” investment. For example, it’s sound advice to put money in a savings account. The clue is in the title. Millions of customers do it every month, putting a little aside, to use later. But even that cash risks losing value because the interest a bank pays won’t always keep up with rising prices, called inflation. This threat to your buying power is especially true at the moment with near record low interest rates.
So you might be attracted to another common form of saving – index-linked accounts that guarantee interest rates equal to inflation. But if the cost of living goes down and inflation falls, you might be paid less than you hoped.
Money in stocks and shares can beat interest rates over time but their value can fall too, and, when you need to sell, they might only provide a small return – or even lose money. So if you have been wondering “How to invest my money?” it is important to understand you will never eliminate risk. And there is no such thing as a get-rich-quick scheme. Good investment takes time and the more time you take, the more you can protect yourself.
How to invest my money myself
While there’s nothing wrong with shorter term investment strategies, the general wisdom is that risk is lower if you are prepared to wait for your money to grow over the long term, preferably five to 10 years – and you are confident you have enough money to cover your expenses for six months. Even then, you should still only invest amounts you can afford to lose. Don’t think small amounts invested aren’t useful, though. It’s often said that just £25 a month can be a starting point. As billionaire investor Warren Buffet said: “I don’t look to jump over 7ft bars. I look around for 1ft bars I can step over.” It seemed to work for Buffet.
Next, do as much homework as possible on types of investment, to find one most suitable for you. It can be a good idea to consult an independent financial adviser (IFA) who should help you gauge your appetite for risk. This often involves honestly answering questions about your lifestyle, regular expenses and loans or debt you may have. If you are paying into a private or workplace pension you are already investing tax-efficiently, which may mean you don’t need to invest much more each month.
Finally, you are ready to start building your portfolio. Think of this as a basket of any investments or “assets” you hope to profit from. It could eventually include shares, foreign currencies, property and commodities.
One way of investing is to buy shares (a stake in a company). If the firm performs well, the share value rises and they can be sold at a profit. They may also pay a dividend in the meantime. The main UK stock market is the London Stock Exchange, where shares in companies, government bonds and derivatives can be traded. It is split into different indices, the most famous being the FTSE 100, made up of the largest 100 companies.
If you want to be hands-on, you might consider buying shares yourself. However, this can be time-consuming and complicated, which is why many people choose to use a fund where lots of savers’ cash is pooled.
There are two types:
- Active funds employ managers to do research, meet companies, decide where the best opportunities lie and when to buy and sell.
- Passive or tracker funds simply follow an index and buy shares in all its companies to replicate its performance. There are pros and cons for both.
You, of course, can invest in both, perhaps using a passive fund for well-known markets like the stock exchange and an active fund for less well-researched markets where expert knowledge could be more valuable. Funds come with charges but can save on dealing costs because trades are made on behalf of everyone. Funds also reduce risk by diversifying your investment so that if one company performs badly you won’t lose everything. And they help expose you to asset classes that might normally be beyond you.
You will often be asked to decide on an income version or an accumulation version. The first pays a dividend as cash. The second reinvests that money to buy more assets, increasing value. It’s often wise to drip feed money into a fund so that the risk of losing a lump sum due to unfortunate market timing is reduced. This is called pound cost averaging.
Many investors also chose to invest in blue-chip companies and keep shares for at least five years to help iron out bumps in the market. The more you trade, the more you will incur fees that eat in to returns.
How to invest my money wisely
Although it’s advisable to take professional advice, it is also important – and sometimes even interesting – to do your own research. Read the financial pages in newspapers and perhaps follow a favourite expert on social media. They will often be helpful analysing different types of investments, companies and markets. Radio 4’s Money Box is an invaluable consumer programme. It has a web site too. Perhaps join an investment club to talk to like-minded people. And, of course, do research on the internet using sites such as theinvestmentassociation.org.
It is important to understand your time scale. It will affect your appetite for risk. If you need short-term profit – to get on the property ladder for example – you should probably be avoiding volatile investments and markets. If you can afford to invest over the longer term, you might be able to accommodate short-term falls for the opportunity to make higher gains later.
Ironically investors in their 20s and 30s can sometimes afford to be bolder because they have the luxury of time to cushion temporary losses. They might choose emerging markets for example.
Shrewd, often more seasoned, investors move riskier shares into less volatile stocks as they approach the point where they want to access their investment, choosing more modest returns for the chance to “lock in” profit.
It’s often said that when shares are falling it is best to ignore the instinct to cash out – and actually buy more. You’ll get extra stocks for your money and, if you are part of that five to 10-year plan mentioned above, you may eventually see greater profits. Conversely, when markets boom, it’s wise not to give in to greed and buy shares that may not be worth the price.
Again, Warren Buffet was good at this. He is one of the greatest examples of a “value investor”. That is someone who makes it their business to find companies with strong “fundamentals” such as competent management and good balance sheets. Sometimes in unfashionable sectors, these firms’ shares are often valued at less than their worth. He made it his mission to find them, buy them and wait for the market to catch up.
How to invest my money online
The rapid development of technology has revolutionised the way you can find, buy and sell investments. You can even manage most of this on your smartphone giving you a transparency, flexibility and control previous generations only dreamed of.
There are many online DIY platforms that help you set up an account, research and build a portfolio, trade stocks and shares and monitor them. You can make it tax-efficient with a stocks and shares ISA or Sipp (self-invested personal pension). The culture of online investment is often community-based, so feedback is frequent. But although the days of having to find and pay a stockbroker may have changed, there are still charges.
You’ll either pay a flat administration fee or a percentage charge linked to the size of your investment. There may also be annual management charges for funds you hold and dealing charges, so it’s important to work out how they eat in to profits. Customers investing small amounts tend to benefit from percentage fees. As your pot gets bigger, a flat fee may be better. Those who trade regularly should benefit from lower dealing charges – or even free trading – while occasional investors could do with a lower admin charge.
The good news is that competition in this area mean costs are consistently being trimmed and made more transparent.
How to invest money in the UK
Britain has a thriving alternative investment market embracing everything from classic cars, stamps and antique collectibles to shipping containers and property. Here, knowledge is often power. £1,000 would have bought you a single bottle of Chateau Lafite Rothschild 1982 in 2000. Sold in 2010 it would have made 1,137% profit. Buyers investing in the 2010 vintage, however, have lost 50%.
Peer-to peer lending, where the internet empowers you to connect with borrowers, cutting out banks and earning you interest of sometimes up to 7%, has mushroomed. By last year 150,000 people had P2P accounts with companies such as Zopa, Ratesetter and Funding Circle. Around £6 billion has been lent.
Similarly, crowdfunding – financing projects with small amounts from many people – is on the rise. This is especially popular as a way of buying into the commercial property market which is normally restricted to the very wealthy or institutional investors.
Gold is regarded as a safe haven for cautious investors, its price soared £47 an ounce to £1,000 after the uncertainty of the Brexit vote, for example. Although keeping an ingot under the stairs isn’t practical, exposure to the precious metals market can be bought using an exchange traded fund, a type of low cost fund that tracks prices. The Royal Mint also sells gold in units of £20 upwards. There are also infrastructure funds whose fortunes are not linked to stock markets. Some invest in solar panels and wind farms for example. Some renewable energy schemes have been offering returns of 6% a year, with a fair wind behind them.
Finally, a word on Britain’s financial watchdog. The Financial Conduct Authority (FCA) highlights hazardous investments and regulates firms. Financial advisers should not recommend products if they are:
- Riskier than you were led to believe
- Sold without a proper explanation of the risks and/or
- Not eligible for compensation if things go wrong.
While the regulator exists to protect you against unscrupulous and dishonest firms, it cannot protect you from making wrong decisions. No investment opportunity offers a 100 per cent guarantee that you will make money – there is always an element of risk. Wise investors will do their homework before committing their cash, assessing the merits of each opportunity, ensuring they don’t overreach their affordability, and devising a strategy to mitigate risk.
Go into investment well informed, with your eyes open and willing to accept the lows as well as the highs and it can be a very rewarding activity indeed.
Quoin Club is a commercial property crowdfunding platform that offers the opportunity to invest in carefully curated properties with an initial investment from as little as £1,000. This allows investors to directly own a share in commercial property while Quoin Club’s team of experienced asset managers take care of all aspects of property management. The Quoin Exchange allows investors to easily trade their shares in properties, offering greater liquidity. To find out more visit QuoinClub.com