We all want to build up wealth. We might start young with saving pocket money, graduating from piggy bank to savings account and putting money away each month once we have an income.
But savings accounts can now pay less than inflation, actually reducing the value of money over time. To get your money growing you need to think about investment. You don’t have to start rich to be an investor. In fact, you can start with as little as £50 per month.
Why investment is not like saving
With saving your money stays as cash, and is absolutely safe. Even if something was to go wrong at the bank, or any other UK savings provider, the Financial Services Compensation Scheme would reimburse you in full up to £85,000.
With investment, your money is used to buy something, such as a stock, or share in a business. The value of the company you buy into can rise or fall depending on the market, so your investment can go down as well as up. Investment therefore means a certain amount of risk. As a rule of thumb, the greater the risk, the more rewarding the investment could potentially be.
However, there are ways to limit that risk. Anyone who receives – and follows – regulated financial advice on investment is also covered for £50,000 under the FSCS.
Planning your investment
There are many ways to invest. To understand what might be right for you, think about what you are investing for. What is your timescale? How much money will you need to achieve your goal, and what do you think about risk?
If you invest for 10 years or more to grow capital, you may be more comfortable with the idea that the value of your investment may go up and down. If you are close to retirement and want a steady stream of income, you might be wary of risk.
Then you need to decide what type of investment will fit your objectives and attitude to risk.
What is a portfolio?
The investments you own are called a portfolio. Spreading your portfolio across different asset classes helps lower the risk. Asset classes include:
- Bonds or fixed interest securities
Other types of investments can include:
- Foreign currency
- Collectibles – which could be art or even classic cars
- Contracts for difference, which are basically bets on shares gaining or losing value
But these might be better for expert investors.
Shares and bonds
There are many types of investment. The most commonly known are shares and bonds.
Shares are simply a stake in a company. They let you share in any profit the company makes, which may be distributed as dividends. You can also buy and sell shares, taking advantage of fluctuations in share price, although this kind of active trading might best be left to experts.
A bond is a loan to a company or government. The time and the value of the loan are set in advance. You should receive an agreed rate of interest and get all your money back at the end. Bonds are rated to reflect the risk they present: Gilts are bonds issued by the UK Government, and almost completely safe. Junk bonds can offer high returns, but with a much higher risk that the company issuing them will go broke, taking your initial investment with them.
Investments in property could be in homes like a buy-to-let flat, or commercial property like shops, hospitals or factories. Income comes from rent, while in the longer term there should be the prospect of capital growth.
You can also buy shares in property-related companies, which own and manage things such as retail parks and industrial estates.
Commodities are physical resources such as gold, oil or foodstuffs. A futures contract is one way of trading commodities and is an agreement to buy or sell, a specific quantity of a commodity at a specific price on a specific future date. It is a complicated arrangement, and commodity investment may be more suited to experienced investors.
Finding suitable investments demands time and research. It can also mean risk, so the most popular way to start investing is via a fund. Funds such as unit trusts or investment trusts have a professional manager who will pool your money with that of other investors and purchase a wide range of assets, spreading the risks. They constantly review the investments and change them as necessary.
Naturally, there are charges for this service, but in return you will get professional investment management and a spread of holdings. Some funds invest in specific sectors, or for specific objectives. You can shop around for a fund that matches your plans.
Usually tax is payable on the income and profits made from an investment, but you can make your investment tax efficient. An individual savings account or ISA is a wrapper in which to hold your investment, which shelters it from the taxman You can currently shelter up to £20,000 of investment each year, and there will be no income tax to pay on the money your investment makes.
Finding out more
The investment word can seem very confusing at first, but things can soon become a great deal clearer if you have an expert at your side. To discuss your investment needs, and the various ways to meet them, simply call Continuum. We’ll be very happy to help.
The value of investments can go down as well as up and you may not get back the amount invested.