How To Invest Money – Forbes Advisor UK – Forbes

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The Forbes Advisor editorial team is independent and objective. To help support our reporting work, and to continue our ability to provide this content for free to our readers, we receive payment from the companies that advertise on the Forbes Advisor site. This comes from two main sources.
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Updated: Jul 20, 2022, 7:23am
If you have money you have at your disposal beyond your living expenses, saving and investing can help you to meet your long-term financial goals.
That said, it can be hard to navigate through the multitude of options available. To help with this, we’re going to take a look at how to invest money, from setting your investment goals to finding the right type of investment for your individual circumstances.
Remember, investment is speculative and your capital is at risk. You might not get back some or even all of your money.
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Saving typically refers to putting money to one side, usually in a cash-based savings account. Here you will be paid a rate of interest and your money, or ‘capital’, will not be at risk. 
If a UK-registered savings account provider goes bust, account-holders are protected to the tune of £85,000 by the government-backed Financial Services Compensation Scheme.
Over time, however, the purchasing power of money on deposit will be eroded by inflation. More on this below.
When you invest, you put your money into a range of different assets, from property to shares. 
This differs from saving due to the uncertainty over the amount of money you will receive when you sell the asset. The value of the asset might rise, but you also risk making a loss if you have to sell the asset for a lower price than you paid.
So why do people choose to invest rather than save their money?
The rule-of-thumb is to build an emergency fund to cover three or preferably six months of living expenses. This could cover unexpected costs such as car repairs or bridge a gap between jobs. It’s recommended this money is held in an instant access savings account so you can withdraw it at short notice without penalty.
If you have personal loans or credit card debt, it makes sense to repay these first if you’re being charged high interest rates. It may also be worth looking at cheaper options, such as a 0% balance transfer credit card or a lower interest personal loan
The rough rule is that, if you’re paying more in debt interest than your money is earning, you should use the money to pay down or clear the debt.
Although the risk varies by the type of investment, investing carries the risk of losing some, or all, of the money you invest. There is also a risk that returns might be lower than expected. You should not invest money if you are not comfortable in taking these risks.
Before deciding on the type of investments to make, you should think through the following questions to help you make the right investment plan for your circumstances:
Start off by establishing your overall financial goals. Short-term goals might include buying a car or putting money aside for a deposit for a house in the next two or three years. 
You might have medium-term goals, such as building up a fund to support your children, or going on a once-in-a-lifetime holiday. 
Long-term goals might be to start investing in a personal pension to supplement your state pension.
It’s important to set your financial goals at the outset so that you can match the most suitable investments in terms of time periods, together with their associated risk and returns.
Having put aside money for a rainy day fund, the next decision is how much to invest. 
It’s a good idea to work out whether you have money left over at the end of the month after paying your expenses. If so, you might want to consider investing a regular amount every month to build up your investment pot over time. Or you might look at investing a lump-sum such as a bonus or inheritance.
Whichever option you choose, you should work out the amount of money that you are able to invest and whether you might need to access this money in an emergency.
On the whole, there is a correlation between risk and return – investors who are willing to take on a higher level of risk are potentially rewarded with a higher level of return. 
Government bonds or ‘gilts’ are considered low-risk investments and currently offer a return or ‘yield’ of 1-2% (based on their current trading price). 
Investing in the stock market is higher risk but the FTSE All Share index has produced an average annual return of 10% over the last 30 years, according to Vanguard Asset Management. 
Within the stock market itself, there’s a wide variation in risk and returns. For example, among the 57 investment sectors, Latin America has delivered one of the highest returns of 5% to date in 2022 – but after posting the lowest returns across the sectors in the previous two years, with negative returns of 12% and 15% in 2021 and 2020 respectively, based on data from Trustnet.
Having decided on your financial goals, you should work out how long you want to invest your money for. In general, you should look to invest for at least five years – stock markets can fall, as well as rise, and this helps you to smooth out the average returns. 
Investing for less than five years can present challenges. If you need to access your money at short notice, and your investments have temporarily fallen in value, you may be selling them at  a bad time. 
If you may need to access your money in the next few years, you’d be better advised to keep your money in savings accounts where your capital is protected.
By the same token, if you are looking to invest for a longer period of time, such as for a pension, you may choose higher-risk options as your investments have time to recover from any dip in value.
Whatever your chosen time period, it’s wise to change the balance of your portfolio as you approach the time to sell the investment. Selling a proportion of your stock market investments over time, and depositing the proceeds into a savings account, protects your money against a short-term fall in the stock market.
There are two types of return on investment – ‘capital’ growth (an increase in the value of your investment), and income. 
With a savings account, you receive an income in the form of interest. With investments, it usually takes the form of dividends – these are cash payments made by a company to shareholders, usually on a yearly or half-yearly basis.
Although many people invest in the stock market for capital growth, the ability to produce an income stream can be useful. For pension investments, an income stream can be used in retirement, while leaving the capital invested to grow in value and produce income in the future.
However, there can be a trade-off between income and capital growth. Some of the high-growth, US technology companies choose to reinvest surplus profits rather than pay a dividend, which should theoretically lead to higher capital growth. In contrast, some lower-growth, blue-chip companies in the UK pay regular dividends to shareholders.
You can usually buy ‘income’ or ‘accumulation’ units if you’re buying a fund-based investment. With ‘income’ units, any dividends or income are paid out in cash to investors, whereas this income is reinvested to buy additional units under the ‘accumulation’ option.
There’s a wide choice of assets to invest in – from physical assets such as property, classic cars, fine wine and jewellery to financial assets such as shares, funds and bonds. 
If you’re looking to invest in financial assets, it’s important to spread your investment across different asset types. A balanced and diversified portfolio helps to protect against one investment underperforming and may also smooth out the different levels of volatility.
Let’s take a closer look some of the options available to investors:
Buying shares in a company may reward investors with capital growth and an income in the form of dividends. There’s a wide choice, including 1,300 companies listed on the London Stock Exchange. 
Half FTSE 100 companies delivered a double-digit gain in share price in 2021, according to research by interactive investor. Top of the pack was plant hire provider Ashtead Group, achieving a 72% increase in its share price over the year. 
At the other end of the scale, Flutter Entertainment, a sports-betting company, suffered a 27% decrease in share price in 2021.
However, investing in shares is a higher-risk option as the share price is impacted not only by the stock market as a whole, but also by company-specific factors. 
One option is to invest across a number of companies in different sectors, alternatively, investing in a fund offers a ready-made portfolio of shares in companies.
A passively-managed fund, also known as a ‘tracker’ or ‘index’ fund, aims to replicate the performance of an index such as the FTSE 100 or the Nasdaq. The fund will buy all of the underlying shares in the index, usually in the same proportion as their market value. 
Passive funds are also a low-cost option – Morningstar reports that average annual fees are 0.12% for passive funds, compared to 0.62% for actively-managed funds.
Passively-managed funds come in different forms but exchange-traded funds (ETFs) are one of the most common types. 
In addition to the main stock market indices, some of the more specialist ETFs also track commodity indices such as precious metals, crude oil and semiconductors. WisdomTree Tin was one of the top-performing ETFs in 2021, delivering a return of 135% as tin prices hit an all-time high.
Passive funds are a good option when stock markets are rising as they provide investors with the average return for the index without the risk of investing in an individual company. However, they are a higher-risk option in falling or volatile markets, as fund managers can’t take steps to protect against losses.
Actively-managed ‘collective’ investments pool together money from investors to be invested by a fund manager on their behalf. They charge a higher fee as the fund manager aims to outperform an index such as the FTSE 100. 
Depending on their investment mandate, they can invest in a range of different assets (e.g. shares, commodities and property), sectors (such as technology, healthcare and infrastructure) and geographies (including the UK, the US and emerging markets).
There are two main types of actively-managed collective investments:
Shares can be held in a normal share account with your platform, broker or advisor, in an Individual Savings Account (ISA) or directly (via an employee scheme). However, the way you hold shares matters for tax purposes. 
Outside an ISA, income tax will be charged on dividend income you receive, subject to a £2,000 tax-free dividend allowance (in the current tax year). 
You may also be liable to pay capital gains tax on any profits you make when you sell investments. Everyone has a capital gains allowance (£12,300 for the current tax year), which is the amount of profit you can make before tax is payable. 
Alternatively, investments can be held in a stocks and shares ISA, which is tax-efficient as there is no income or capital gains tax to pay. The current ISA limit is £20,000 per year. There are other similar ‘tax-efficient wrappers’ for investments, including Self-Invested Personal Pensions, Lifetime ISAs and Junior ISAs.
According to research by Boring Money, the DIY investment market is booming, with an increase of 34% in assets on DIY investment platforms in 2021. However, making your own investment decisions requires you to research the options and monitor your portfolio. 
If you do not feel comfortable in making your own decisions, a suitably-qualified financial adviser or wealth manager should be able to make recommendations. However, this will be a higher fee option than using an online platform. 
Alternatively, there are three ‘hybrid’ options for DIY investors looking for some additional guidance:
Online investment platforms have grown in popularity with investors, with some of the big names including Hargreaves Lansdown, AJ Bell and interactive investor. Investment platforms are also offered by brokers, banks and other financial providers, including investment managers such as Fidelity and Vanguard.
You should always check that your provider is authorised and regulated by the appropriate regulatory body, such as the Financial Conduct Authority, and that client money is covered by the Financial Services Compensation Scheme. 
Here’s a few tips when it comes to comparing investment platforms:
Finally, it’s worth considering whether to invest a lump sum or invest a regular amount every month. 
Again, this depends on how much risk you’re willing to take and whether you have the money available to invest. Typical minimum ISA limits for investing in funds are £100 for a lump-sum and £25 for monthly investing.
Drip-feeding your investment on a monthly basis helps you to benefit from ‘pound-cost averaging’ which allows you to buy investments at a lower price if stock markets fall. However, if stock markets are rising, you sacrifice potential gains.
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Having worked in investment banking for over 20 years, I have turned my skills and experience to writing about all areas of personal finance. My aim is to help people develop the confidence and knowledge to take control of their own finances.

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