There is a lot of talk out there about “investing”, but for many of us knowing the different ways to invest, what is right for us and how to make the first step is still a topic shrouded in vagueness.
So, to get some answers and make things simpler, we will be looking into the main questions related to taking the leap and becoming an investor.
What is an investment?
Many of us have come across the term “Investment” during one time or another. However, we are not always clear of what this means.
There are 3 main types of investments:
Ownership investments which include stocks and relevant stock market products, businesses (as in your own business), crowdfunding in return for shares, real estate and precious objects and collectibles.
These are the most volatile types of investments however they can also prove to be the most profitable ones. For this type of investment, a long-term strategy tends to pay off the most!
Lending investments where you essentially lend your money in return for a set revenue. This includes savings accounts, cash ISAs, which will give you a small return in the from of interest from the bank and bonds, where the risks and returns vary widely depending on the type and quality of the bond.
Lending investments are considered less risky overall, however if the bond issuing company goes bankrupt, their value is lost and the investor is left with a loss of their investment.
Regarding savings accounts, banks nowadays have a safety net of up to £85,000 in a personal account and £170,00 in a joint account per bank or building society (as of 2017).
Cash equivalents such as a “Money Market fund” which is a “Mutual Fund” that invests in cash, cash equivalent securities, and high credit rating debt-based securities.
These investments tend to be easily converted to cash (high liquidity) and are usually only carrying a small level of risk. Earnings are not set and as with every investment the value can increase or diminish.
When is investing right for you?
There are a few points to keep in mind when starting to invest.
The amount that needs to be committed to an investment
Is the commitment going to affect your finances, can you afford it, do you have any other financial commitments such as dept etc. that require regular repayments? If the amount required for an investment is low enough to be sustainable even if you end up losing it (relevant to the risk of investing), then this investment is a good starting point. Committing an affordable amount initially is essential. Try out the investment and top up regularly as you feel more confident.
Your extend of knowledge on the investment type
If you are planning to invest in stocks read up on it, follow the news and try it out with a simulated account where you don’t have to commit any money initially. The same goes for the other types of investment like property, bonds, mutual funds and collectibles. You wouldn’t want to start committing your money unless you have done your research into what to expect from your investment.
How long you can commit to your investment and what your expected returns are
There could be a number of reasons why you want to grow your money. It can be to create an extra income, to plan for the children’s future, to have a sum available for your retirement or because you want to grow your money instead of just leaving it in the bank. A good tip here is to plan long term, as most investments and especially stock market related investments, tend to perform far better over a longer period of time with 5 years usually considered as a time frame to start seeing good returns.
Planning even longer term can make a big difference to the growth of your investment with 15 or 30 years being a popular investment time frame to increase the investment returns. Longer investment time frames help alleviate short term stock market fluctuations presenting investors the average returns over that time.
What to avoid
Which brings us to the point of what we should be careful about when investing. There are a few common omissions that are made when investing and we want to make sure we avoid them.
Investing in only one product
This means putting all your eggs in one basket and over-committing your cash to one investment. There are so many different ways to invest and in order to have the best chances of success and peace of mind, it’s best to invest in a couple of different types.
And do your research before committing – I cannot stress this enough! You could choose to invest in the stock market and a government ISA (for the UK), or stocks and a property, or bonds and a property depending on which combination you prefer. There are a number of combinations to choose from as per the investment types section above! Overall it’s best to create an investment mix (portfolio) that you are comfortable with.
Following a trend or a tip
This can be a terrible idea as these do spread like wildfire without usually being of real substance. Always allow yourself to find out more and then have a go at trying out that investment – wherever possible – with a small amount to mitigate your risk while building your confidence and knowledge on the selected type of investment.
Is there a way to invest and avoid the pitfalls?
If you want to try out investing while steering clear of the tricky part and still reap the rewards – or returns in this case – try our “invest from £10” product.
Using our MarketsFlow Intelligent Investment platform to help optimise the performance of our accessible portfolio means you can invest from as little as £10 and still get the best possible returns for your money.
You can read more on “How MarketsFlow solves a big part of the investing problems” and “MarketsFlow Accessible portfolios, why are they so important?” on our blog.
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If you have any questions, please contact us, we’ll be happy to hear from you.
Thank you for reading!
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