There are many good reasons to start investing money and you don’t need huge sums to start.
Profits from investments can help you to pay off university loans, afford a deposit for a house, or save for a comfortable retirement.
If you’re interested in investing, here are five tips to make the most of your money.
1. Manage risk and reward
All investments carry some risk, and different investments carry different rates of risk and reward. So, before you invest, it’s important to know how much risk you’re willing to take with your money.
The higher the level of risk on an investment, the greater the level of potential reward. But there is generally also a higher risk of the value of your investment falling too.
A good example of a low-risk investment is a government-issued bond (often called a ‘gilt’). With this, you can be sure of getting your money back, but you might not make much return.
An example of a high-risk investment is individual company shares. Whilst there is the potential for their value to sharply increase and make a profit, shares can also fall in value, making them worth less than when you bought them.
Investments can be simplified into three types: low, medium, and high-risk.
- Low-risk investments are usually guaranteed not to fall in value but also offer low returns which are unlikely to increase much more than inflation.
- Medium-risk investments have good long-term potential for profit but also have a higher risk of making a loss.
- High-risk investments can be very profitable if the risk pays off, but also carries a significant risk of losing your investment.
Tip: Decide how much risk you’re prepared to take before you commit to any investment. Working with a financial planner can help you to determine your risk tolerance, and therefore what investments might be suitable for you.
2. Don’t put all your eggs in one basket
If you decide to invest, you’ll notice that there are plenty of options to choose from when it comes to what to invest in. An easy mistake to make is thinking you only need to choose one.
The best way to mitigate risk is to invest in several different markets. This is called diversifying your investments.
Diversifying your investments means that if one market that you’ve invested in takes a fall, only part of your investment is affected but your other investments might see growth.
To put it simply, diversification is all about not putting all your eggs in one basket.
Tip: Consider investing in a range of asset classes to ensure you’re not over-exposed in one particular type of investment.
3. Invest for as long as you can
One important piece of advice which you’ll often hear from experts is to invest for as long as you can.
Short-term volatility can have a big impact on stock markets. If you’re thinking of investing in stocks and shares, you should aim to invest for at least five years.
This logic can be seen using this data from the MSCI World Index (a basket of more than 1,600 large and mid-sized companies across 23 developed countries) since 1970.
Since 1970, the index shows that the highest annual return of a short-term investment (of one year) was 56% but the lowest was a 30% fall. Over any ten years, the highest return was 24% but the lowest was only 0.21%.
As you can see, although the profits of a long-term investment may be more modest, the risks are significantly reduced.
Tip: Think about how long you want to invest for. Only commit to stock market-based investments if you’re prepared to commit for more than five years.
4. Shop around for the most reasonable investment charges
Many investment products have some type of fee or charge associated with them. If you want to make the most of your money, it is important to shop around for the best deal.
It is tempting to think that difference of a few percent in charges is negligible, but this isn’t the case. Over a long period, even small percentages can add up and eat into your investment.
Here’s a simple example of this, with two investors who invest the same amount but with different levels of charges.
| Investors | John Smith | Jane Smith |
|---|---|---|
| Starting investment | £10,000 | £10,000 |
| Yearly returns before fees | 5% | 5% |
| Yearly charges | 1.25% | 0.5% |
| Investment value after 20 years | £20,696 | £24,014 |
As you can see, even a difference in charges of less than 1% can add up to a significant amount over a long period.
This is why, if you’re considering investing, you should always make sure to compare charges to maximise your returns.
Tip: Check the charges on any investments you are considering, and what effect they might have on your overall returns.
5. Seek professional financial advice
If you’re serious about investing, it can be hugely beneficial to seek advice from an experienced professional. Even the most well-read amateur investor is likely to make mistakes that a professional wouldn’t.
A financial adviser will be able to formulate a financial plan, considering factors such as what you are saving for, your risk tolerance, and how long you can commit your money. They can also help you to maximise the tax-efficiency of your investments.
Tip: Work with a financial adviser to create a financial plan and investments that suit your risk tolerance and long-term goals.
Get in touch
If you’re thinking of investing in the stock market or want advice on your existing investments, we can help. Email enquire@london-money.co.uk or call us at (0207) 808 4120 to find out more.
Please note:
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.