There is a common misconception that investing is for the rich. This can deter ordinary savers from looking to the markets to meet their long-term financial goals. This is of course a myth, and you can invest from as a little as one pound, but many savers are keeping their wealth in cash.
Is cash safe?
For those wanting to keep their money safe, cash is traditionally the place to keep it. Whether it’s in a cash ISA, under a mattress, or in a piggy bank, avoiding the fluctuations of the stock market is still a comfort for many. But cash isn’t as safe as it once was.
It’s a been a long while since your money could earn a decent return (interest) sitting in a cash ISA or in a savings account, but unfortunately those days are probably gone for good. Interest rates have slumped to historic lows, with the current base rate sitting at 0.1%. Inflation has risen recently (in June it was 2.4%). That means that while you might be adding a tiny bit of interest to your savings, inflation will mean that your money will have less purchasing power in the future.
For example, if you put £5,000 into a cash ISA with a base rate of 0.1%, you’ll have £5,005 at the end of the year. But that £5,005 will be worth £4,884.88 in 12 months’ time anyway, because of inflation. If your returns don’t match inflation, you’re effectively losing money.
No matter whether you’ve got a £10,000 lump sum sitting in your savings or want to set up a regular investment of £50, it might be time to think about investing.
Why should I invest?
Investing offers savers an opportunity to generate inflation-beating returns — although the value of investments can go both up and down, of course.
People have different savings goals; some might want to save up to fund their travels, others want to get on the housing ladder, get married, or build up their retirement pot — the list goes on. Someone saving for a holiday might want their money sooner than someone who’s planning to buy a house or investing into their pension, these different time horizons carry different risk levels.
Despite its negative connotations, risk isn’t always a bad thing. Investments work by balancing risk and reward — typically, the higher the risk the higher the potential return, but also the losses.
Understanding your risk level means your portfolio has the best chance of achieving your long-term investment goals. If you’re a few years away from retirement, your portfolio will have more assets that are typically seen as safer — like bonds. Someone who is 20 and saving for retirement should take on more risk because short-term losses are unlikely to matter in 40-or-so years.
How much do I need to start investing?
The more you can save for your future, the better. But you don’t need a small fortune to get your money to work harder for you. Whether a small inheritance is sitting in your savings account or a pay rise has left you with a little (or a lot) more at the end of the month, you can invest this straight away.
How often should I invest?
To generate meaningful investment returns, investors want to buy at the low and sell at the high. The only problem with this strategy is that it’s incredibly challenging for an investor to do it correctly every time — investors need to have the time to monitor the markets, the skill to respond to any opportunities and the money to fund the frequent trading. Many have paid the price for thinking they can beat the market.
Instead, investors should take a risk-adjusted approach — this is called pound cost averaging. This little-and-often regular investing approach prevents investors from trading on sentiment and smooths out the fluctuation of an asset’s value over time. This is a much more flexible approach to investing than committing all your capital at once.
You may also generate higher returns than if they were timing the market. For example, an investor that had invested in the S&P index between 1994-2014 would have generated a 9.85% annualised return. If they’d missed the 10 best performing days, the investor would have made just 6.1%.
Can I access my cash in an emergency?
Long-term investing doesn’t have to mean locking your cash up for years to come. If you’re saving for a rainy day, you need to know you can access your investments when the stormy clouds gather above. Even if you’re certain you won’t need to access your cash for a number of years, life has a habit of surprising us.
How can I reduce risk?
One way to reduce risk is to diversify your investments. Achieving a diversification level that doesn’t weigh on your returns, but accurately reflects your risk levels requires cash, however, and quite a lot of it. Managing your own portfolio of stocks and shares can eat into your finances and time, so investment funds, investment trusts and ETFs are a good way to diversify.
Known for being low-cost and transparent, exchange-traded funds (ETFs) are an increasingly popular option for investors wanting diversity. They offer exposure to markets by tracking an index or group of investments.
Risk isn’t bad though. In the short-term, fluctuations to a portfolio’s value can be damaging, but over the course of a decade, risk is the thing that generates the very returns you’re looking for. If you really want to see powerful returns over an extended period of time, it pays to stop seeing risk as a scary thing.
Where to invest
Of course, everyone goes into investing for the returns. You can have preferences around what you invest in and how — you may want to make ethical choices with your money, for example — but ultimately making money is the name of the game here. When thinking about how to invest money, the amount you want that pot to grow is always going to be a decisive factor.
There are three main ways to invest: Do it with me, do it for me, and do it yourself.
Do it with me
Financial advisers offering financial planning to help you meet your long-term financial goals. They will also recommend investments, but the decision is ultimately yours. If you’d like to find an adviser visit vouchedfor or unbiased.
Do it for me
Some people are uncomfortable with making decisions and would prefer someone to have an expert make the decision for them. That’s where wealth managers can help. If you’re new to investing, digital wealth managers might be a good option. They combine the service of a traditional wealth manager with sophisticated algorithms and technology at a keener rate. Use our calculator to find the right one for your needs.
Do it yourself
The third option is to do it yourself. Even if you don’t have a background in finance or deep knowledge of investing, most DIY platforms have plenty of guidance, recommended fund lists and suggested portfolios depending on your risk and investment horizon. To find the right DIY platform, click here.
How to invest my money
In this current climate, it doesn’t pay to keep your money in cash. Chances are you’re thinking that now is the time to make your money work harder for you. Make sure you can answer these five key questions before you start:
What am I saving for?
When do I expect to access my money?
How much can I afford to invest each month?
What is my risk profile?
How am I going to reduce risk through my investment strategy?
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