Working in the financial services, I find myself often going straight into jargon and analysis on topics, it is easy to forget not everyone has a deeper understanding of it all.
Comparing the investment returns of FTSE 100 stock picks with 90% leverage property and a Seedrs VC portfolio doesn’t interest everyone. But it should! It is so interesting!
Whether we like it or not, and whether your retirement is around the corner or in 40 years, it’ll involve investments. If you invest well, you can significantly bring forward your retirement / house purchase / relocation / dream Porsche etc. Why start investing?
This graph is heavily caveated, that it is a vast simplification. If you can get investing correct most of the time, you will earn significantly more, significantly earlier, than you would holding money in a savings account. I don’t even hold mine in the highest interest rate account!
I think it is fair to say that it is pretty well-documented what your options are. Here is a Finance Pondering (FP from now and forever) breakdown of the different ways you can invest your hard-earned cash.
Investment strategies / methods / options
- Low-cost index fund
- Direct stocks
- Equity funds
- Direct private debt
- Alternative capital markets investments
- Property funds and crowd-sourcing
- Direct property
- P2P lending
- Other lending alternatives
If you view investments (alternatives to holding onto cash in a savings account) as a ‘risky’ asset, you’d be correct, to an extent. The investing 101 cliché of risk vs reward is a good and simple way to view the investment options you have. In general, the higher rewards you are looking for, the riskier the asset underlying it.
This being said, if you are completely petrified of investing in stocks, I ask you this – with the incredibly valuable lens of hinds sight – how risky was it to say that Microsoft will be worth more in 2019 than it was in 1999?
What are they and what do you need to consider
Low-cost index fund
This is an index tracker. An investment vehicle which will track, by buying the stocks of, an index of your pick. There are the classic index trackers; S&P 500, FTSE 100 and NASDAQ.
If you imagine – you want your investment return to track that of the S&P 500 (the flagship American stock market index), how do you go about investing in an entire stock market? The Vanguard S&P 500 tracker buys every single stock that is in the S&P 500, with the weighting that matches it directly.
Pros: really simple and cheap
Cons: completely matches the stock market in a downturn
Arguably the easier to get your head around. This is buying a share in Microsoft, Apple, Royal Dutch Shell etc. This is done through your bank or a specific stockbroker.
Pros: seen as an enjoyable option with great upside
Cons: stock-picking is not simple and high-risk
See here my personal stock portfolio series.
This is where your workplace or personal pension will be (and, where your government pension will currently be invested). This, and it isn’t an index fund, is where you invest in a pool of stocks that is managed and picked by the fund manager.
This can also be done through your bank or a specific stockbroker.
Pros: really simple and often a good strategy for long-term saving
Cons: most don’t outperform the general stock market
Direct private debt
Whilst ‘Direct private debt’ sounds illusive, this is just the debt that every listed company will take out in the market. Riskiness of this can be very dependent on the company underlying it. Investing in current Apple corporate bonds will be a safer and less rewarding than holding a riskier bond in
Thomas Cook, Metro Bank.
Alternative capital markets investments
This is a catch-all term for things like Venture Capital (VC) raises, Private Equity (PE) funds, currencies and commodities. Another in this category would be something like Bitcoin, a commodity that I personally cannot say I would count as an option because it seems like a hype.
Cons: High risk and more difficult to find the actual mechanism to invest
Property funds and crowd-sourcing
One of the benefits to the British/American obsession with property, is that we have developed a mechanism to invest in property without actually putting down a deposit for one that you will ever actually own. The most common and oldest vehicle is a Real Estate Investment Trust (REIT), which can be found on your banks’ trading platform or a stockbroker as per a normal fund.
Pros: exposure to property without saving a vast property
Cons: exposure to property comes with risks, which is especially true when you don’t have ultimate ownership
This is something that really requires no explanation. Bricks and mortar.
Pros: leverage of mortgages, saves paying dead rent
Cons: negative equity etc. etc.
Have to be fair and say that I really don’t know much about P2P, I do see that a lot of sites lock-in your rate, though. If these are FCA approved, then, I certainly should look into these.
Pros: alternative to those above
Cons: regulation, high research required into the site you are lending through
Other lending alternatives
Undoubtedly, I’ll come back to this blog and thicken it out over time. Not to mention the ultimate goal of providing a blog post on each of the 9 listed investment mechanisms above.
Why are we spelling this out?
It is fair to say that there is still a significant shortfall in the financial literacy of the average consumer in the economy. For every minute you view consumerist spend-easy lifestyles on Instagram, do you offset this with a review of the offers available at your bank for savings, growth and investment planning?
As you can see there are a number of options for your investments. As you would expect, this list is not exhaustive and has purposefully left out the following – the classics:
- Savings account
- Holding cash
- Pension pot (which is de facto one of the above)
- Premium bonds
I will undoubtedly come back to this blog and thicken it out over time. Not to mention the ultimate goal of providing a blog post on each of the 9 listed investment mechanisms above.
In conclusion, it is fair to say that there is still a significant shortfall in the financial literacy of the average consumer in the economy.
Why to start investing? Why do they say Money makes money?