Hey guys, Vee is here J
Most of us want to make our money work harder, so today I will focus on different ways you can invest your hard-earned money and hopefully achieve your financial goals.
Risk appetite
Okay, first things first. Before you can choose the right investment tool, you would need to assess your risk tolerance. Risk tolerance means how much risk you’re willing to take. The risk is defined as lack of control over something, such as: events, new regulations, weather, you get the idea. Generally speaking, the more risk you’re prepared to take higher return you might expect in the future, demonstrated by the graph below.
Source: ww.esthelis.dk
As we can see from the graph, higher risk leads to higher return.
To prove this concept, think of one year saving account and shares in the company. The chance that bank will lose 100% of your money is very low therefore, rate that you get per year will vary between 0.5% - 1.25% on average.
On the other hand, shares are more volatile (daily movement of a share price) thus more risk of losing your initial investment. However, it also means that share price can greatly increase in the future and therefore provides higher returns. The shares are one of the most common tools for building wealth, there are many types of shares but we’ll discuss it in details further down the article.
Source: www.standardlife.co.uk
Personally, I’m the medium risk taker according to these tests but in the reality, I would say
I am slightly above the medium as I understand the importance of taking extra risk. However, this is my personal preferences and you only should choose an investment that you feel comfortable with.
To assess you risk tolerance finish these online free tests:
- Standardlife.co.uk
- Vanguard.com
- Rutgers.edu
After you have identified your risk profile then you can start choosing right investment assets for your portfolio.
Goals and Time-period
Okay, hopefully now you know your risk level. The second most important part is your financial goals and the time frame. Some of the investment tools are better for the short term and others for the long term. The perfect example of long term are shares or bonds and for short term bank deposits or derivatives.
For example, if your aim to make 10% in a year then bank deposits are unlikely to provide such great returns within this time frame, especially at given risk of this product. To achieve this goal, you must take considerable amount of risk.
For the long term 10+ years I would suggest to use shares. The shares are known to be the best tool for building wealth in the long run. The greatest investor Warren Buffet once said “Our Favourite holding period is forever” if the person with total net worth of $84B has made his wealth through stock markets then I would listen to an old man.
Stocks, Shares and Equity
These terms are practically one thing so don’t get confused by it. Shares are versatile tool for short and long term goals.
Personally, I have few different stock portfolios that I manage on daily basis.
If you want to make your money work harder consider investing your money into defensive or dividend paying stocks.
Usually, these are large corporations such as: Unilever, BAE systems, HSBC, BP and others. These companies are at maturity stage which means they are not growing that much as smaller companies and quite often these companies pay very nice dividends.
If you search hard enough you can even expect 7% per annum worth of dividends.
Here is the table of dividend paying companies:
(Source: Finance Yahoo)
Vodafone Group (Ticker: VOD)
Yearly Dividend Yield: 5.16%
Industry: Telecom Services British Land (Ticker: BLND)
Yearly Dividend Yield: 4.55%
Industry: REIT Retail
Pearson (Ticker: PSON)
Yearly Dividend Yield: 7.43%
Industry: Publishing
Royal Dutch Shell (Ticker: RDSB)
Yearly Dividend Yield: 6.81%
Industry: Oil & Gas Integrated
There are more than 2000 companies are listed on London Stock Exchange. I’m sure you will find the right company for your purpose. If you want to make quick money, consider small capital companies listed on AIM100. These companies have higher risk of losing money but also higher expected returns.
Invest your money in bonds
Bonds are great tool for diversification of your portfolio thus helps you to spread your risk. Bonds are long-term obligations issued by the government or public companies such as: Apple, BP, Facebook etc.
Generally, bonds are for conservative investors who don’t want to take a lot of risk. Therefore, returns are also relatively low but higher than bank deposits on average.
Gilts (Bonds issued by the British government) provides extra security as your money backed up by the government. Current coupon (yearly rate) for 10-year gilt will earn you 1.23% a year. If you want to achieve higher returns using bonds, check 30-year bonds issued by private companies, however this is riskier investment.
Exchange traded funds (ETFs)
ETF is a great tool when you want to get an exposure to financial markets but you have small amount you can invest, particularly applicable to students.
Exchange traded funds are an investment vehicle which tracks performance of an index or specific asset such as: Gold, Gas, Oil, Metals etc. The price of ETF directly changes as the price of item it tracks.
Source: www.hnfc.co.uk
Investing in shares can be tricky as you need to analyse companies and design your own portfolio to spread risks. The ETF does it all for you. For example, you can buy iShares Core FTSE 100 UCITS ETF (Dist) which tracks FTSE 100 index. FTSE 100 is the main British index which includes 100 biggest companies by market cap. Therefore, when you buy an ETF you indirectly invest in 100 companies thus spreading your risks.
The great advantage from this operation you will save a lot of money on commission fees. Since, 1st of January until 3rd of December 2017 the performance of an index is 2.46%. However, the index growth over the last 5 years is 23.5% and it means the index grows at 4.7% per year on average. (23.5% /5 years)
Bank Deposits
Most common way of saving and multiplying your money is to create saving account with a bank. This is quite interesting option as recently Bank of England has increased the interest rate to 0.5% per year.
Therefore, people can expect slight increase on their saving accounts.
Here are some best deals I could find:
AA ISA (1 Year Fixed Rate ISA)
1 year long, 1.36% p.a, Initial deposit £500.
Leeds Building Society 1 Year Fixed Rate ISA Issue 100
Until 02/01/19, 1.35% p.a, Initial deposit £100.
Ford Money Fixed Cash ISA
1 year long, 1.25% p.a, Initial deposit £500.
Peer-to-Peer Lending
Peer to peer lending means you’re lending your money to someone else through the platform (Broker). Usually, you’re lending your money to companies that have higher risk. Due to this reason banks are unwilling to provide required amounts.
The advantage for you is higher interest payments. Interest payments can go as high as 12% per year on best cases.
Here is an example of peer-to-peer lending platform “Lendy”
The reason I’ve chosen this company is that all loans are backed by some sort of physical asset such as: Property, gold, car, jewellery etc. Therefore, you know that when you’re lending your hard-earned money in case of a company going bankrupt all assets will be sold out and paid back to original lenders.
However, it does not mean that you will get 100% of your initial investment back but still extra security is always good to have. On this platform, you can expect yearly interest payments of up to 12% a year, the rate depends to which project you’ll decide to allocate your money.
The Block Chain and Cryptocurrencies
Finally, I would like to focus on the block chain technology. You might have heard about the “Bitcoin” the digital cryptocurrency.
Bitcoin is made on the block chain technology which means the store of information is decentralised, no any authority has direct control over it. The reason I’ve brought this up is buzz and investment potential around it.
One thing you should know about cryptocurrencies is they are very risky investments with extreme volatility.
The simplest example would be daily change of 20% of Bitcoin cash. It means you can make 20% on your investment in a single day but what it also means you can lose 20% in the same day. These sorts of investments are not for everyone.
But if you’re risk taker you won’t find a better tool than cryptocurrencies. To trade crypto, firstly you will need to set up a wallet and exchange account. For beginners, I would advise to use “Coinbase” as this company is a wallet and exchange itself with friendly and simple interface. You can deposit your money using your debit/credit card or through bank transfer.
Thank you for your time reading this article.
Hopefully by now you know what you want to do with your money.
Remember to only invest money you can afford to lose.
If you have any further questions regarding investments, you can always ask me.
I will be more than happy to assist you.
See you on the next one ;)
