What is investing and how do I start?

We all have those big life goals we want to achieve, whether it’s a family holiday, getting your foot on the housing ladder, or retiring early. Once we’ve achieved those goals, we want to help those we love to do the same.

Unfortunately, it’s difficult for savers with good financial habits to feel like they’re getting anywhere in this low interest rate environment, especially against the threat of inflation. With inflation currently sitting higher than the Bank of England’s interest rate of 0.1%, any money sitting in cash is probably losing purchasing power over time.

What is investing?

People invest to sustainably grow their money over time. Traditionally, investors put their money in an asset – whether it be a company share or a bond, for example, with the hope it will generate a profit.

A successful investment portfolio can help a saver reach their financial goals a lot quicker than saving alone, particularly in environments like the current one.

Traditionally, investors look for two things from an asset when they invest – capital growth and/or income. Capital growth is when the underlying value of the investment increases, whereas income is a periodic flow of money you get as a dividend or coupon, for example.

You have to be able to value assets to calculate the return you expect from them. Of course, nothing is guaranteed – no asset is completely risk-free.

What types of investments are there?

There are a number of different investment vehicles available to those who are looking to protect and grow their money. No matter what type of investor you are, there’s an investment product for you.

You can invest in company shares on the stock market, or loan money to governments and corporations through bonds for a more stable return.  Some investors prefer more diversified investments like exchange traded funds (ETFs), investment trusts and mutual funds. The money they invest in these products is then invested further by a fund manager.

The investment universe also includes property, commodities, and contracts for future purchases of an asset like oil, for example. You can also flip the dynamic and short an investment – where you make a profit by betting against the market – though this is, generally, deeply ill-advised. 

Each investment vehicle has different characteristics that are suitable for different types of investors. Understanding how they work is crucial when you’re investing your money.

Building a portfolio for you

The traditional wealth management industry is a complex one and it can be difficult knowing which investments will help you achieve your goals. So, it can be difficult to build a portfolio that suits your unique financial situation. It all depends on your investor profile, which is determined by your attitude to risk.

Your risk tolerance depends on what you’re saving for, when you’ll want your money and your financial background when you start investing. One of the most misunderstood concepts of the financial markets, ‘risk’ has negative connotations. Without it, however, savers would just have to accept the impact of inflation. Without taking on a degree of risk, investors wouldn’t make money. 

By taking on more risk with your money, you increase the scope for higher returns – although your investments also have further to fall. Your attitude to risk is personal, so understanding your risk tolerance is the first step to achieving your financial goals.

Diversification

For investors, risk can mean losing money in the short term – nobody wants to see the value of their investments go down. Diversification is a simple concept that helps investors manage the risk inherent in their portfolios.

By spreading your money across different investments, asset classes and geographies, you hope to smooth out any potential losses in your portfolio with gains made elsewhere.

Investors looking for big returns will probably have a high proportion of equities in their investment portfolios. A diversified portfolio would still look at fixed income, however, to try and ensure stability against any unforeseen volatility.

Diversification is a difficult and expensive thing to get right, which is why paying an expert wealth manager to invest on your behalf is so popular. Be careful, though, as some funds can come with expensive management fees and might not offer the diversification or active management you’re expecting.

ETFs, for example, are a great way to achieve diversification at a low cost. A type of passive investment, ETFs track a market or investment in the hope of replicating the returns of the assets in question. They’re easier to trade than mutual funds and they’re more transparent, essential characteristics for busy families looking for flexibility with their investments.

Investing your money

Investing money right takes a lot of time, knowledge and skill to do yourself – it can often feel like a full-time job. You have to carefully monitor the markets, accurately analyse long term trends, all while having the technical nouse to trade on the financial markets.

Once you’ve built your investment portfolio, the work doesn’t stop there. As markets move and your asset allocation changes, you will have to rebalance your portfolio to ensure it still reflects your investor profile. This will ensure your portfolio is in the best position to help you achieve your long-term investment goals. 

Fortunately, there is a cohort of business backed by technology that have established themselves across the last decade or so. These digital wealth managers – and yes, Moneyfarm is one of them – can help put your money to work for you without you having to break a sweat.

Investing with a robo-advisor

Discretionary products do the hard work for you, so you can focus on the important things in life. Unfortunately, the traditional wealth management industry has a number of barriers to entry that can exclude many families from growing or protecting their money.

Expensive fees can eat into your return and delay you reaching your financial goals. Unfortunately, these charges are often placed on funds that don’t have the performance to match.

This constitutes poor asset management, which is why digital wealth managers like Moneyfarm are growing in popularity. We match you to an investment portfolio that’s built around you, actively managed and rebalanced where necessary, while giving you access to the kind of investment advice that can be the difference between stabbing in the dark and investing with confidence.

The modern investor needs flexibility when it comes to growing their money for the future; portfolios built with ETFs allow just that. Not only can you manage your investments at any time of day or night on your mobile or computer, but you can also see exactly what you’re invested in and how it’s performing.  

The hardest question you will have to make is when you’re investing, and with how much.

Photo by Satyawan-narinedhat on Unsplash