You have worked hard, you have saved hard and you’re now ready to invest your money to try and grow your wealth. This is not a decision you have made lightly and a huge amount of effort has gone into getting to this point.
Yes, you could choose to invest in your favourite new restaurant or sports brand but putting your hard earned money behind one business is quite risky. So, unless you are Andy Murray and you can afford to place a bet on the next big thing, there are three things you should consider when starting to invest.
1. Capital preservation
Don’t take unnecessary risks with your money. Make sure you really understand the investment you are making to protect against the chance of loss. You can never guarantee that an investment will not decrease in value but understanding the potential loss in the worst case scenario can help protect against this.
2. Strong risk management
You need to understand your appetite for risk and acutely monitor investments to ensure they match your profile. If you are quite risk averse and you see your investment rising and falling quite rapidly this could make you feel uncomfortable.
3. A flexible investment with an eye on the future
An investment is for the money you need next year, not next week; Warren Buffet famously recommended that you do not invest in something you would not be happy with in 10 years. However, your portfolio should also have a degree of flexibility so you can react to short-term market events.
The Moneyfarm investment process
At Moneyfarm those three considerations underpin everything we do. We understand how important your money is and looking after it is the main reason we are here.
We constantly monitor the types of investments available and select those that we feel are most appropriate to reaching your goals. This research involves looking at the potential returns and risks of each investment type, as well as looking at how these investments react to each other (known as correlations). We call this our “Investment Universe”
This universe is made up of:
Bonds – moderate returns, lower risk than shares, potential for income, can offer protection when shares perform poorly.
Stocks and shares – more risk than bonds but offer higher potential returns, lots of choice, easily tradable (for developed markets particularly).
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Commodities – considered riskier than shares but have high return potential. More importantly, some can offer good protection against rising inflation.
We don’t choose:
Property – whilst an attractive asset class, it can be difficult to buy/sell (illiquid), many customers have property investments separate to their Moneyfarm account.
Hedge funds – we consider these to be to high risk for our investors. Hedge funds often have opaque processes, high costs and are difficult to buy/sell quickly.
An eye on your future
We make market predictions annually. We stress test our investment universe to see how it might perform whilst considering the risk suited to our investors’ profiles. We will ask questions like:
- Are asset classes over or under valued?
- What dividends are they paying?
- Are interest rates going to change?
- What impact will currency fluctuations have?
- How high is inflation expected to be?
- How might supply and demand change?
Creating the portfolios
To create portfolios, we work out which combination of investments will create the highest potential returns without exceeding the risk tolerance relevant to a risk profile.
The portfolio creation stage is impacted by the quality of predictions. A computer programme runs the possible scenarios, both good and bad (about 10,000 in total). We then create the portfolios so they are resilient enough to weather even the worst scenarios.
To buy underlying investments we use Exchange Traded Funds (ETFs). They are low cost and give us exposure to the respective investment type.
Markets are constantly changing so our Asset Allocation Team monitor the markets to ensure they are up to date with the latest events. We rebalance our portfolios every 2 months, this is often enough to ensure we can respond to market changes but also allows us to maintain a long-term vision.