Want to make more of your money? Let’s talk about investing.
No – don’t run screaming from the room thinking a) boring b) gambling c) only for City types in braces.
I stuck my hand up last week and said yes, I’m female, a married mother-of-two on a limited income, and yes, I invest. (Post here) It really doesn’t have to be for squillionaires when nowadays you can start investing online with as little as £1.
Many of us shy away from investing, worried about the risks. But if you keep all your savings in cash, it’s not just a risk that your money will be eaten away by inflation, but a dead cert. Start investing, and you can help protect your financial future.
There are certain basics I had to get my head round before taking the plunge. So if you’d like to start investing, here’s what I’ve learnt.
You risk losing money…
Risk is the biggie. Fear of losing money put me off for the longest time. Investing isn’t like shoving money in a savings account, where you know you’ll get your money back. Prices go up and down on the stockmarket. This means the value of your investments will go up and down, and if you sell when prices are lower than you started, you will lose money.
…but hope for higher returns
The reason anyone invests, despite the risk, is the chance for higher returns. Over the long term, stocks and shares have done better than cash – but there are no guarantees.
Check out this graph:
Basically it shows the London stock market over the last 30 years (data from the FTSE All Share index, fact fans). I take comfort from the fact the line goes up, even if there are some peaks and troughs along the way. I just had to get used to my investment balance changing almost every time I checked – a shock to the system when you’re used to savings accounts!
You need to balance risk and return
I’d love to tell you there’s a dead cert that will earn loads of money. Only problem is that wouldn’t be true.
There’s a trade off between risk and return. Take more risk, and you hope to earn more in exchange for seeing your investment shoot up and down. Prefer something steadier and less risky? Expect to earn less.
Think theme parks. Some people love the massive rollercoasters, screaming along as they rocket up and plummet down. Some of us prefer the gentle spinning tea cups of the investment world, with the chance for calmer but smaller returns.
Only you can decide how much risk you’re comfortable with, but there are ways to make investing less risky.
Even cash has risks
It may sound odd, suggesting cash is risky, when you know your money is tucked up safe in a savings account.
Trouble is, inflation eats away at the value of your savings. If inflation is higher than the interest you earn, then your money will buy less in future than it can today. Right now, staying in cash means you are almost certainly losing money.
Also, if you stick all your money in savings, you risk not earning enough to look after yourself in later life. I don’t fancy living longer than my money lasts, or choosing between heating and eating in retirement. That’s why I pay into a pension and scrape together the money to start investing now.
By investing, rather than keeping everything in savings, you can help secure your own financial future.
The good news is that there are several ways to make investing less risky. Still no guarantees – but less chance of setting fire to your fivers.
Think long term
Time is your friend (she says, looking in the mirror and trying to ignore the wrinkles).
Investing for longer means:
- You can stick around if your investments go down, waiting for the stock market to bounce back.
- You can take more risk – and therefore hope for higher returns – because there’s time for markets to recover
- Your money can earn extra money – via the magic known as compounding. This is where you use any income from your investments to buy extra investments. The next year, the extra investments produce income too, so you’ve got more income and can therefore buy even more extra investments. Hang on in there for long enough, and compounding will really make your money grow.
In practice, experts recommend investing for at least five years and ideally longer. Certainly I wan’t comfortable investing until I’d built up a cushion of emergency savings in cash. This means if I need money in a hurry, I can use the savings. I won’t have to sell investments at a bad time, if prices have fallen.
Mix it up
Sensible investing really isn’t like bunging it all on black in a casino. The technical term is…drum roll please…diversification.
This just means: don’t invest in one thing, but lots. And don’t invest in just one kind of investment, but lots. And while you’re at it, spread it around the world too.
Why? Because if you use all your money to buy shares in a single company, and it goes bust, you’ve lost the lot. But if you bought shares in say 100 companies and one fails, it won’t hit so hard – especially if some of the others are a soaraway success.
Remember your mother banging on about a balanced diet? Same applies to investing. For a healthy portfolio, you need a mix of investments: racy shares in companies (known as equities) plus some bonds to fill you up (bonds are loans to companies or governments) and a helping of good solid cash.
Different kinds of investment are affected by different things, so if one is going to hell in the handbasket, the others might be OK. Spread your money round the world, and if one country is doing badly, another might be doing really well. Using a mixture will help smooth out rises and falls in your balance.
The combination depends on how frisky you’re feeling, what you’re aiming for and if you have a long time to take more risk.
Load up on equities if you can stomach higher risks in hope of higher rewards. Mix in bigger chunks of bonds and cash if you don’t want to see your balance bouncing around all over the place.
Vanguard, the low cost investment manager, has a good post about the differences between equities, bonds and cash, and the different things that affect them (click here to read it). Sure, there are other types of investment out there, but equities, bonds and cash are the three big building blocks.
Get help choosing investments
If you’re all fired up to invest, the hardest part is picking what on earth to invest in. If you have a low budget, it can seem like you’re stuck between a rock and a hard place.
Choosing between thousands of different shares and other investments can be overwhelming. But forking out for an independent financial adviser to chose for you can be expensive. (If you do want to find an adviser, check out unbiased.co.uk)
Instead, you can get help, depending on how many decisions you want to make yourself.
Personally, I’m not confident choosing shares in individual companies. Instead, I prefer to use funds, where I pay annual charges so a fund manager or computer picks lots of investments to put in their fund. I use a type of funds called investment trusts to spread my money across lots of different companies and countries. However, you do still need to pick the funds.
Alternatively, you can make life even easier using a ready-made portfolio, which combines funds and investments for you. You just choose the company to use, and then a portfolio based on the risk you’d like to take. I also have a bit of money in a Vanguard LifeStrategy fund, which blends equities and bonds from all over the world into one low-cost fund, and tweaks the fund in future to keep the same mix.
Keep an eye on costs
Another eye-opener when investing, compared to saving, is that you have to pay. Fees for the account or platform you use to invest. Fees for any investments – potentially fees when you first buy investments, and then annual charges if you use funds. Fees if you use a financial adviser.
Now, I can’t control the stock market, but I can control how much I pay to invest. If I keep costs low, I get to keep more of any money I earn in future. As a frugal blogger, that makes sense to me!
One big thing I’ve learnt since I started investing: a tiny percentage can make a massive difference. Fees of 1% a year may not sound like much, but chopping off even 0.5% really does add up if you are investing over a a long time.
One reason I opened a Vanguard account and chose a LifeStrategy fund is that the account only costs 0.15% a year, and the LifeStrategy funds only cost 0.22% a year. That’s a total of 0.37% year and a lot less than most other ways of investing. I opened the account in May 2017, and in the first six months my money grew 4.8% after costs. That’s a tiny amount of time to compare, but it’s off to a good start.
Pay less tax
The other way to keep more of your money is to use a stocks and shares individual savings account (Isa) when investing. You can put up to £20,000 of investments into an Isa each financial year (chance would be a fine thing), and the tax man won’t take away income tax or capital gains tax.
Small sums add up
Turns out you don’t need millions to invest, but can get started with really small sums. Some accounts can be opened with as little as £1, and many more have savings plans if you can spare £50 to £100 a month.
The Vanguard account I use, for example, which just offers Vanguard funds rather than a wider choice, can be opened with £500 as a single payment, or you can pay in from £100 a month.
The sooner you start, and the longer you keep going, the more chance your money has to grow. I’ve done well so far, and my only regret is that I didn’t start earlier.
Now over to you. Are you ready to start investing? Do you invest already? Let me know in the comments, as I’d love to hear.
If you want to read expert views on investing, designed to help new investors, check out Vanguard’s investing education section.
This post is a collaboration with Vanguard.
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