Investing can be tricky when you’re young, skint & running up student debt. Stock market expert Rodney Hobson shows us how to get started.
Investing involves setting cash aside to grow in ‘real terms’ – that is, your money accumulates faster than inflation (the rising costs of goods and services) so that, eventually, you’re better off than you were before.
While investing has a reputation for being risky, good investing isn’t about gambling – there’s a difference between financial planning and get-rich-quick schemes. The greater the potential immediate rewards seem to be, the greater the risk of getting wiped out. After all, that horse at odds of 100-1 will bring a great pay-off if it wins, but it’s more likely the bookmaker will pocket your stake and you’ll be back to square one.
So, what basics should you keep in mind?
It’s important to consider the total return you get from your investment. Some types offer you income, others capital gains (profits when you sell your investment) – or ideally both.
And don’t forget there are usually costs of holding a certain investment, whether they be broker fees, maintenance work or storage. Then there are taxes to pay and inflation to account for before you realise your actual return.
5 main ways to invest money
Cash in the bank
Seemingly a safe option as you know exactly what you’ve got, but cash itself isn’t a great investment – especially given the pitifully low rates of interest paid by banks and building societies. Interest rates are rarely higher than inflation, which means your money is actually losing value all the time.
If you have zero appetite for risk or are deliberating a longer term plan, by all means put it in a savings account to get some interest. Fixing for 3 or 5 years will give you the highest interest rates, but bear in mind you won’t be able to access it for the period plus you could lose out if interest rates improve.
Whatever you do, just don’t keep your cash under the mattress. Thanks to inflation, it’s losing you the most money there, and if you’re burgled you lose the lot!
Antiques, art, wines and collectibles
Credit: JD Hancock – Flickr
Collectibles can be quite cheap, so they are an affordable form of investment for those on limited means and you can learn as you go along, but if you think it’s an easy path to riches, you’ve probably watched too much Cash in the Attic.
Investing in collectibles brings in no immediate income, and depends entirely on someone paying you more than the items cost you but with the added proviso that fashions come and go, so what is highly desirable today may be passé next year.
You need to be an expert in whatever it is you’re collecting, otherwise you’ll be taken for a ride by those who know what they’re doing. Buying and selling online is typically cheaper than using old-fashioned auction houses and gives you a much wider global marketplace.
A good starter strategy is to source desirable items where there are less target buyers (such as Gumtree or a car boot sale) and selling them where the demand is highest (such as eBay or a club).
Beware of falling in love with the items you collect – that turns the exercise into an expensive hobby rather than an investment!
The best single investment for most people, and the one that you should make as soon as your income allows it, is to buy your own home.
Historically the value of housing rises faster than inflation and one day you will clear the mortgage. Rents rise year by year and you will always need somewhere to live.
Once you’re on the property ladder you can climb up to more expensive properties as your income improves.
As an investor, you can go one step further with buy-to-let, owning property that produces income as well as appreciating in value. The big disadvantages are that you need to commit large amounts of money to each investment, and it can be time consuming keeping an eye on the property and the tenants. Make sure you set aside some money to cover hefty maintenance bills (which crop up whether you can afford them or not!).
Governments and companies borrow money and issue IOUs. Those issued by the UK government are known as gilts, because the certificates used to have gold leaf round the edges to reassure investors how safe they were.
They carry a guaranteed interest rate and – usually – a date on which they will be redeemed, with the borrower buying them back at full price, known as the nominal or par value. The yieldon the bonds (the amount of interest you get each year for every £100 invested) will reflect how safe or risky the investment is seen to be by investors. The safer the debt (the less likely the borrower is to renege on its debts), the lower the yield.
Bonds issued by governments are known as sovereign debt and are generally regarded as safer than company debt because governments are less likely to go bust than companies (however, bear in mind that Argentina defaulted on its debts 10 years ago and Greece has been struggling to honour its obligations more recently).
Unlike fixed-term savings accounts, you can sell your bonds at any time – but the complication with bonds is that you don’t pay 100p in the pound to buy them. They trade at the market value – the price that investors are willing to pay. At times of low interest rates the price of bonds will rise, thus reducing the annual amount you receive for each £100 you invest. When interest rates rise, the market value of bonds falls.
Stocks, shares, equities: different names, same thing. Americans tend to refer to stocks while we in the UK say shares. What they represent is a stake in a company, an equal share in ownership and voting rights with one vote per share. Shareholders also sometimes get dividends (a pay out from profits), usually twice a year although a few large companies pay four times.
Like buy-to-let property, shares provide the potential for your invested sum to grow, plus income, because shares in growing companies increase in value and provide increasing dividends. But with equities you can invest much smaller amounts at a time and they’re much cheaper to hold.
If you’re nervous and don’t have a lot to invest you can put your money into a fund such as a unit trust or an investment trust, which pools your cash with that of other investors to invest in shares on your behalf. You have a manager doing your investment for you, so it takes away the worry.
Why Gold isn’t so great
Gold has been prized by virtually all civilised societies in recorded history – but calling it a safe haven, as the press does, is something of an exaggeration. It actually fell in value over 20 years between 1980 and 2000, and has tumbled by a third over the past four years.
Gold earns you nothing – indeed, it can cost money to store and insure it. Plus, you depend entirely on someone else buying it from you at a higher price than you paid. As gold is valued in US$ per ounce, you also have to keep track of foreign exchange rate changes if you want to invest in it.
So, watch out for the types of investment that don’t bring you immediate benefits (such as somewhere to live) or which rely on trends or other people’s tastes.
My final recommendation is this: if you can, use your ISA annual allowance to shelter your cash and equity investments from the taxman. On 5th April every year, any unused ISA allowance for the previous 12 months disappears – make the most of it while you can!