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How to invest money

investing, diversification, cash

The common misconception that investing is a luxury for the rich can deter many from looking to the markets to help improve their financial wellness. Although this is a myth and investing is as accessible as ever, many savers are still opting to keep their wealth in cash.

For those wanting to keep their money safe, cash is traditionally the place to keep it; whether in a cash ISA, under a mattress, or in a piggy bank. But cash isn’t as safe as it once was.

Is cash safe?

There was a time that your money could earn a decent return just sitting in a cash ISA – those days are over. Although interest rates are in the doldrums at 0.25%, economic momentum has pushed the latest inflation figures to 2.3%. Essentially, your money is going to have less purchasing power in the future.

For example, if you keep £1,000 in a cash ISA with the best easy access rates of 1.05%¹, you’ll have £1,010.50 at the end of the year. But that £1,010.5 will be worth £987.26 in 12 months’ time anyway, thanks to inflation. If you’re returns aren’t matching inflation, you’re effectively losing money.

No matter whether you’ve got a £10,000 lump sum sitting in your savings or want to set up a regular investment of £50, if you’ve paid off any debt, it might be time to think about investing.  

Why should I invest?

Investing offers savers an opportunity to generate inflation-beating returns – although the value of investments can go both up and down, of course.

People have different savings goals; whilst some want to save up to fund their travels, others want to get on the housing ladder, get married, or build up their retirement pot – the list goes on.  

Someone saving for a holiday might want their money sooner than someone who’s planning to buy a house or investing into their pension, these different time horizons carry different risk levels.

Despite its negative connotations, risk isn’t always a bad thing. Investments work by balancing risk and reward; typically, the higher the risk the higher the potential return, but also the losses.

Understanding your risk level means your portfolio has the best chance of achieving your long-term investment goals. If you’re a few years away from retirement, your portfolio will have more assets that are typically seen as ‘safer’ – like bonds. Someone who is 20 and saving for retirement will be inclined to take on more risk because short-term losses are unlikely to matter in 40-or-so years.  

How much do I need to start investing?

The more you can save for your future, the better. But you don’t need a small fortune to get your money to work harder for you. Whether a small inheritance is sitting in your savings account or a pay rise has left you with a little (or a lot) more at the end of the month, you can invest this straight away.

How often should I invest?

To generate meaningful investment returns, investors want to buy at the low and sell at the high. The only problem with this strategy is that it’s incredibly challenging for an investor to do correctly every time – investors need to have the time to monitor the markets, the skill to respond to any opportunities and the money to fund the frequent trading. Many have paid the price for thinking they can beat the market.

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Instead, investors should take a risk-adjusted approach; pound cost averaging. This little and often regular investing approach prevents investors from trading on sentiment and smooths out the fluctuation of an asset’s price over time. This is a much more flexible approach to investing than committing all your capital at once.

You may also generate higher returns than if they were timing the market. For example, an investor that had invested in the S&P index between 1994-2014 would have generated a 9.85% annualised return. If they’d missed the 10 best performing days, the investor would have made just 6.1%, research from asset manager JP Morgan shows.  

Can I access my cash in an emergency?

Long-term investing doesn’t have to mean locking your cash up for years to come. If you’re saving for a rainy day, you need to know you can access your investments when the stormy clouds gather above. Even if you’re certain you won’t need to access your cash for a number of years, life has a habit of surprising us.

Whilst investors can easily access their money within five working days on investment platforms like Moneyfarm, some products, like the Lifetime ISA, aim to lock your cash away to be spent on certain life events. If you need to make an urgent withdrawal that’s not buying your first home or for retirement, you’ll be penalised.  

How can I reduce risk?

One way to reduce portfolio risk is to diversify your investments. Achieving a diversification level that doesn’t weigh on your returns, but accurately reflects your risk levels requires cash, however, and quite a lot of it.

As managing your own portfolio of stocks and shares can eat into your finances and time, collective investments are a popular option for those wanting a slice of the diversity pie.

Known for being low-cost and transparent, exchange traded funds (ETFs) are an increasingly popular option for investors wanting diversity. They offer exposure to markets by tracking an index or group of investments.

Global investors paid a record $197.3 billion into ETFs between January and March².

How to invest my money

In this current climate, it doesn’t pay to keep your money in cash. Chances are you’re thinking that now is the time to make your money work harder for you. Make sure you can answer these five key questions before you start!

  1. What am I saving for?
  2. When do I expect to access my money?
  3. How much can I afford to invest each month?
  4. What is my risk profile?
  5. How am I going to reduce risk through my investment strategy?

¹Money Saving Expert – Best easy access cash ISAs

² Financial Times – Exchange traded funds attract record inflows in first quarter

 

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