Interest rates these days suck.
Let’s say you were holding £10,000 in a savings account at 0.7%, approximately the average interest rate offered by UK banks between 2011 and 2017. Through those 6 years, you’d have turned your £10,000 into a whopping £10,350. But did you really? Inflation over that same 6 year period averaged around 1.7% – meaning the spending power of your money would actually be closer to £9,500.
Investing your money could allow you to actually grow your savings and beat inflation. But investing isn’t without risks, and while taking on greater risks also increases potential rewards, you’ve got to be aware of the potential for losses too.
When you’re investing your money, it’s highly recommended you consider the following tips.
Why are you investing?
Make sure you set yourself clear goals for your investments. Whether you’re seeking to grow your worth, you’re after a regular income, or just want to save for that Lamborghini, having set goals in mind will make it more clear how much risk you need to take to achieve them.
You might not even have anything particular in mind, say you just want to put your money somewhere it’ll beat inflation and actually grow, that’s okay!
When do you ‘need’ the money?
Figure out how long you need to achieve your goals. Think – are your goals realistic in shorter time frames? You’re unlikely to be able to turn that Ford Fiesta into a Lamborghini in just a few years!
Consider your age and health, too. Short term goals reduce your capacity for risk, because you might not have time to recover your losses should they occur.
The longer term you consider, the more appropriate greater risk becomes. Which brings us nicely to…
What is your attitude towards risk?
You need to know how you feel about risk. You might have long-term goals and plenty of time to achieve them, but if you think you might lose sleep with your money in a riskier investment, then lower risk alternatives might be more your thing.
How much can you afford to invest?
Be realistic. Never invest more than you can afford to – or are willing to – lose. You’ll be prone to making irrational decisions and might end up losing more. As with your attitude to risk – if you’re losing sleep over the value of your investments, then you’re likely over-invested.
Where are you putting your money?
We’ve talked a lot about how much risk you’re willing to take on, and how long you’re planning on keeping your money locked up for. But where do you put your money once you know this?
The four main asset classes are cash, bonds, property, and shares. I’ve also tacked on cryptocurrencies as an asset class for those who are prepared to take on the highest of risk.
Cash
We’ve already covered cash. It’s the lowest risk, sure, but often struggles to beat inflation. That’s not to say you shouldn’t have some easy-access cash to hand for emergencies! I recommend checking out somewhere like Money Saving Expert for your best options with regards to savings accounts and ISAs.
Bonds
The next asset class in terms of risk are bonds. These can be further split up into government bonds, investment grade corporate bonds – lending your money to companies at a fixed interest rate – followed by high yield bonds. High yield bonds are also high-risk, often referred to as ‘junk bonds’, because you’re lending money to companies with a high risk of defaulting. If you’re considering investing in bonds, I highly recommend you also consider a peer-to-peer lending service such as Zopa (see here for more information).
Property
Investing in property can see great returns. Whether you’re investing in commercial or residential property, you’re likely to beat inflation. It’s difficult to sell such investments if you need to access your money, so be aware of this before exploring this asset class. For more information, check out this article on Zoopla which should explain everything you need to know about property investments.
Shares
Often seen as the riskiest asset class – there are others such as foreign exchange, commodities and cryptocurrencies which often see greater risks and returns involved – since the stock market is highly unpredictable. If you’re unsure about investing in the stock market, most banks offer a range of Stocks and Shares ISAs, or you could consider a service like eToro if you’re aware of the risks.
Cryptocurrencies
An extremely volatile and risky asset class. The cryptocurrency market is unregulated and open to manipulation, but there’s possibility of obscene rewards. In 2017 alone, the cryptocurrency market as an asset class grew by 34x, with some assets seeing returns as high as 10,000%. Do not under any circumstances consider this asset class unless you’re prepared to see your portfolio balance swing 10% in either direction on the regular, often during the same 24-hour period. A service such as Coinbase is a good place to start, however.
And finally,
Who can you talk to for advice?
If you’re still not sure what to do with your money, seek financial advice. A financial adviser will have more knowledge, experience, and confidence than you will, and you’ll be able to talk with them about everything we’ve covered above. Seeking financial advice will guarantee your financial investments are tailored to your individual needs.
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