Investments

Investing is generally seen as a way to make the most of your savings. There are many financial products that you’re able to invest in including, Stocks & Shares, Investment Funds and many more.

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Investments are a way to make the best of your savings.

You stand to make extra money from your savings if you invest them. But, with some investments, you might lose some or all of the money you have invested.

Investing involves risk. Generally, the higher the risk that you might lose money, the greater the reward that you might make money. You pick your investment depending on what balance of risk you are happy with; this balance is often called the "risk/reward ratio".

A good example of an investment with a high risk/reward ratio is emerging markets equity. While emerging markets offer new investment opportunities and their elevated economic growth offers higher than expected returns the risks can be much higher.

The financial reward on an investment generally comes in the form of increase in value of the asset in which you have invested.

Investments often come in the form of financial products. These can be accessed from lending banks, online portals and arranged via financial advisers. The following are all types of investment product: stocks, options, specific education and retirement plans, futures, initial coin offerings.

Alongside formal investment products are a range of "alternative investments". These vary widely from online crowdshare schemes to substantial assets such as property, jewellery and fine art.

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Investments: where to start

To get the most out of investing, you need to understand first and foremost that investing is for the long-term – or not at all. Short-term investing is not investing – it is gambling! You need to be prepared to put money away for a minimum of 5-10 years. Investments generally only produce results if you give them plenty of time.

Dividend payments are normally a proportion of company profits divided amongst its shareholders. Be aware that some companies may not be profitable or may choose not to pay dividends even if they are, choosing to re-invest profit instead.

Stocks and shares appreciation is the growth in the value of the shares that you own over time. It is important to note that stocks and shares valuations can go up and down over time and you may not always get back the money you put in.

To get started on your investment journey, create an investment plan:

  1. Seek professional advice
  2. Decide your investment goals
  3. Identify investments that support your goals
  4. Stick to the plan

Seek professional advice

A qualified IFA can give you expert guidance – but ultimately it is you who must decide what to do with your money, so seek as much advice as you can.

Decide your investment goals

Are you saving for the very long-term – retirement perhaps? – or for a shorter-term goal – to develop an emergency fund? Your goals in life should determine your investment goals. Be focussed. Decide what it is you are trying to achieve and write it down.

Identify investments that support your goals

You have many investment options. Be sure that you have an investment plan that makes sense; professional help is invaluable to get things straight from the start.

Online there are many ways to handle investing yourself, with numerous brokers and exchanges available. Low-index tracker funds are particularly popular as a low-cost, low-risk way of gaining exposure to the stock market. But it pays to look at all the options available, and a professional is likely to have a good sense of the scope of possibilities available to you.

Many companies offer investment funds which are risk-rated. This means that the fund, which might have exposure to a wide mix of sectors and assets, is set up to offer a certain risk/reward ratio. One fund might be very conservative; another, very adventurous. This type of fund gives the investor a useful range of easily-understood choices (although, of course, no investment is ever guaranteed).

Stick to the plan

Often, the best possible thing you can do once you have made your investments is to do nothing! Investments take time to return value. Resist the temptation to chop and change.

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How many investments should I have?

It depends on a) how much you have to invest, b) how experienced you are, c) how much time you want to be spending on your investments.

As a result, US wealth giants Forbes say that, "The right number of investments may range anywhere between one investment and forty."

So which is the right number of investments for you?

How much do you have to invest?

The less capital you have to invest, the less investments you should have. There’s no point spreading money too thinly across investments. That’s because various charges apply to many investment transactions.

How experienced are you?

With investment it is critically important that, with each investment, you understand what you are getting your money into. The investment sector is growing all the time and offers literally hundreds of thousands of opportunities. So, if you are starting out, take it slowly. Resist the temptation to expand your portfolio into "exciting" new sectors until you are fully-informed of the risks.

How much time do you have to give to your investments?

Because investments work best over the long-term, leaving them alone is often the best option. But if you have many investments, you will still need to keep an eye on all of them. So do not overburden yourself. You can hire professional help – in the form of an IFA to give you general guidance or buy into an actively-managed fund and have a pro stock-picker make decisions for you. But always remember that your investments are your money and nobody else’s. Investing is about taking responsibility. So do not take on too much.

But don’t put all your eggs in one basket…

An important principle of responsible investing is to spread your investments across different asset types, industry sectors and geography – this is called "portfolio diversification". It means diversifying your investments so you don’t end up losing everything in the event of a major loss in one specific area. It is also known that, when some investment areas do well, others inevitably do badly – so if you have a little exposure to both areas, your portfolio as a whole will remain healthy. Spread the load and play it safe.

Which investments are the safest and which are the riskiest?

Strictly speaking, no investment is entirely safe. We all know that anything can happen in life, particularly when it comes to money.

Buying stocks and shares (equities) usually comes with slightly more risk. There are ways to reduce the risk – like buy into a managed fund, hiring specialist advice in the form of an IFA, or diversify your portfolio – but ultimately your money in stocks is hitched to factors you cannot control.

Investopedia confirm that, "Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day."

Arguably most risky of all is leveraged investing, where you agree to have your money exposed to a market at a higher ratio than 1:1. For example, you might buy into a stock at leverage of x10 – which means you will lose or gain ten times the normal change in price. You can lose all of your money very quickly by getting carried away by leveraged investing, which several online trading platforms offer. But you can also make a fortune very quickly.

Considered to be a safe haven when other markets are volatile is the commodity gold. Many professional diversified portfolios hold 10% gold as a buffer against bad times in other markets.

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The big question for many investors is – are investments taxable?

Many investments are taxable in the UK. But how the profits on an investment are taxed depends on the wider tax situation of the owner. That’s why independent financial advice is so valuable; you need to know where you are with your taxes before you can make sensible decisions about investment.

Whether your investments are taxed depends on:

  • What type of investments you have
  • Which nationality you are
  • Which country you are living in

If you are a UK citizen living in the UK, you can avoid a certain amount of tax on investments thanks to the Personal Savings Allowance.

Depending on the Income Tax band your income falls under, the Personal Savings Allowance is a different amount:

  • Basic rate tax payer – £1,000
  • Higher rate tax payer – £500
  • Additional rate tax payer – £0

(The Money Advice Service, UK)

The Personal Savings Allowance means that, as a basic rate tax payer for example, you can earn up to £1000 in investment interest per year tax-free.

Aside from your Personal Savings Allowance, as a UK citizen you can earn up to a certain amount each year (whether through work or investment interest) without paying tax. This amount is called your Personal Tax Allowance, and depends on how much money you earn. As from April 2019, the Personal Tax Allowance for basic rate taxpayers stands at £12,500 – which means you can make this amount (whether through investment or working) and not pay tax on it.

With investments, generally a range of taxes apply, including:

  • Income tax on any interest (outside of your personal allowances and/or ISA)
  • Capital gains on shares – 10% or 20% depending on your tax band
  • Dividends – paid at 7.5%, 32.5% or 38.1% depending on your tax band.
  • Stamp duty on shares tax – usually a 0.5% fee on transactions, over £1,000

Speak to an Independent Financial Adviser to assess what particular taxes apply to your unique investment situation.

Tax rates, allowances and reliefs are as at May 2019 and are subject to change in the future. The benefit of any allowances and reliefs depends upon your personal situation and may also change over time.

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