There are many forms of investment out there, but what are the best investment plans? Your plan will be unique to your own circumstances and situation. However, if you’re starting out and really have no idea where to begin, there are broad strategies that you can follow.
Having a sound investment plan is a key component of attaining Financial Freedom.
Passive income is the overriding goal when it comes to investing. Investments are intended to either appreciate in value, bring in passive income, or ideally both.
So if you’re just getting into the investing world and don’t know where to start, you could chat to a financial adviser, other investors or do some research of your own – which is likely why you’re here.
But if you’re looking at taking control, especially as some countries expect you to create your own investment strategy for retirement, then you want to do a little digging.
Basic Investment Types
Now if you’re already contributing to a pension fund as part of your employment every month, then that is already a step in the right direction. I’m not going to include that in my post today, as here I’m going to focus more on investments that you have control over investing in.
Also known as equities, stocks and shares are where you buy a proportion of a company’s capital, and become a partial owner of that company. You are entitled to a share of the company’s equity (net worth) and if the company declares a dividend (payout of profits), you are entitled to a share of that.
This is, and always has been, a popular method of investing and one that most commonly springs to mind when people talk about investing.
2. Mutual Funds and Index Funds
A mutual fund is essentially a pool of money from a collection of investors and invested in a variety of securities like stocks and bonds. Mutual funds are generally managed, with fund managers responsible for picking investments and profiting off of shareholder fees. You purchase into the fund and essentially contribute towards the pool, but have no control over the individual assets and securities that are purchased and held in the fund.
Index funds are slightly different. Whilst the fund follows that same basic methodology, they track a specific index (e.g. S&P500).
Instead of being actively managed like mutual funds, index funds are mostly passive as they are automatically investing is stocks on the index they’re tracking. As a result, fees for index funds are often significantly lower than mutual funds.
3. Bonds/Gilts/Treasury Bills
Bonds are effectively you lending money to a company or government. In return, you receive interest and the issuer promises to pay back the loan on a specified date.
Gilts are UK government bonds, which are issued to help finance public spending. PIBS (Permanent Interest Bearing Shares) are issued by UK building societies and work similarly to bonds.
A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000.
4. Real Estate and Property
Property – everyone loves property! It’s tangible, so you can see and feel it. However, as investments come it can be the one with the highest entry costs. Even a small buy-to-let property will require a significant deposit, legals and transfer duties.
Real Estate Investment Trusts (REITs) are companies that own, operate or finance income-producing real estate. Through a REIT, investors have the opportunity to own valuable real estate and access dividend-based income and total returns.
I have included REITs here as I think it is a good second option to investing in real estate if you cannot buy the bricks and mortar version just yet. It could also be included in the Funds category above and you’ll need to have a trading or brokerage account with a broker or platform to purchase REITs.
Crowdfunding (a form of peer-to-peer lending) is another form of real estate investing. You can contribute some money to a crowd funding platform who in turn buy a property with the pooled funds or lend out to property investors and developers who are looking for finance for their projects. Crowdfunding uses leverage by having many investors putting in varying amounts and then using this combined amount to lend on to the developers. You’ll earn a return on the money, usually agreed in advance – and most often is significantly better than any rate a bank will give you. Just beware that it can be the riskiest of the 3 options presented here as developers could go bust. Also, it’s not a short term, nor a long term, set-and-forget strategy – usually 1-2 years.
5. Gold and Silver
Gold, silver and other commodities are probably investment vehicles you’re most familiar with. For thousands of years, gold has been used as a store of wealth and still remains a solid investment choice. In times of disruption and economic uncertainty, it is most attractive.
However, there are some downsides. Whilst you can buy gold virtually and hold an interest in it via some platforms, I would recommend that if you’re buying gold, buy the physical thing. That way you don’t have to worry about losing it if the broker goes bust for any reason.
Obviously this in itself presents some risks; where do you safely store it, how do you take delivery and what about insurance? If you intend on building up a stockpile of physical gold and bullion, I’d suggest getting a safe deposit box at a reputable bank and using this to store and protect your investment.
Obviously this isn’t for everyone, and if you’re just dabbling in the commodity, you should be fine using an online platform.
6. Bitcoin and Cryptocurrency
This is still a market in its infancy and comes with additional risk. I have included it here as Crypto is getting more and more attention and is rapidly growing in popularity.
Up until a few years ago, buying Crypto was not a very straightforward task and this presented a significant barrier to entry. However, with the rise of competition amongst the trading platforms, the buying process has become much easier and simpler which has opened the market up to the public.
The technology that Crypto is build on (Blockchain or Decentralized Ledger Technology – DLT) is a major breakthrough and I can see HUGE potential going forward.
I do believe that this industry still has a lot to grow and that it will become a significant market in the future. But I would not recommend this as a core investment strategy at the moment, particularly if you are only just starting out in your investment journey. I would, however, recommend some exposure in your portfolio (c.5%).
There will be more to come in future posts about Blockchain and Crypto, so subscribe below to receive notifications when those posts go live.
Hey, But What About…?
I know there are some other types of investments that I’ve not covered, but that’s because I wanted to keep this topic broad and targeted at beginner investors. There are additional investment vehicles like ETFs, Options, Commercial Property and even buying whole businesses, but these are more complicated and some require a substantial amount of capital. I will save this for future posts.
What level of risk should I take?
Generally speaking; the older and closer to retiring you are, the lower the risk you should be taking with your investments, and visa versa. The logic behind this is that as a younger person, you have time on your side and can afford to take some risks with your investments (remember that higher risk often comes with higher return). However, if it goes wrong, you’ve still got time to course correct on your way to retirement.
If you’re nearing retirement, you really don’t want to be taking massive chances with your money and end up losing a large chunk, or even all of it, just when you really need it.
Have a look at the below Investment Risk Matrix to get an idea of the general risk profile of certain investments.
WHAT Should I Buy?
Well, it depends…
It depends on your attitude to risk, your funds available and strategy preference.
If you’re new at the game and you don’t have the time, or the inclination to get intimate with investment cycles, then there are simple strategies you can use to at least begin your investing journey. There’s nothing to stop you tweaking or changing it as you move forward and begin to understand the markets, investments and strategies better.
If you’re looking to diversify, and that’s never a bad thing, I’d look at allocating a majority share into Mutual Funds, with smaller portions into some select stocks and shares, real estate (REITs and Crowdfunding if you’re still not ready or able to buy bricks and mortar) plus a minority exposure to some cryptocurrency.
There are many versions of the below, and the composition of each can fluctuate depending on who you speak to. However, the assets in each are usually constant. Ultimately, asset allocation is not an exact science and can have big differences between one opinion and the next.
OK, So WHEN Do I Buy?
Trying to time the perfect entry into an investment is anyone’s guess, especially in the stock and cryptocurrency markets. Even seasoned traders can get this wrong, so what chance do you have when you’re just starting out?
Also, this is really only truly important for day traders, not long term investors. When investing for the long term, you’re targeting stock that’s going to appreciate over time, so if you buy at one of the smaller peaks at the beginning of your investment journey, it doesn’t matter in the long run.
If you’re like the majority of people and are looking to consistently invest a portion of your income every month, then this is considered a robust approach by many. All you need to do is decide what proportions of that amount of money you want to invest in what (e.g. stocks, funds, commodities, bonds etc.). Setup an automatic process where investments are made by your chosen online investment platform or broker.
A benefit of having an automatic process of investing is that it eliminates emotion, which can trip up even seasoned investors. Take the emotion out of investing, routinely invest a specified amount every month, and over time your portfolio will grow.
Additionally, you may have a lump sum that you wish to invest too, however this is less straight forward. There are conflicting opinions on which is better – invest the entire amount at once, or average it out over a period of time – also known as Dollar Cost Averaging (Pound Cost Averaging in the UK).
Cost averaging is where you apportion your investment funds and invest into your chosen investments at specific intervals over a given period of time. For example; if you had $10,000 to invest, and then split it into $1,000 invested every month for 10 months to try and get an average exposure to the market prices over that period.
Personally, if faced with this decision, I’d take the middle ground. Try splitting up your lump sum into only a few portions (e.g. 3 or 4) rather than many and then allocate to your chosen investment types over a shorter period of time – say every fortnight. This is more of a diluted form of DCA.
HOW Do I Buy?
If you’re still completely overwhelmed by the prospect of overseeing your investment strategy, then you can involve a broker, however just be aware that this will come with an additional cost.
The most common and preferred methods are using online investment platforms such as Fidelity, Hargreaves Lansdown and the like.
Starting small? Try a fractional share investment platform – you don’t need to buy a full share. Why is this relevant? Well, say you’d like to invest in Tesla; at the time of writing this, Tesla’s stock is trading at $1,527 per share. Chances are, if you’re just starting out, you might no be willing or able to buy even 1 share. That’s where fractional shares assist; you can invest $100 rather, and purchase 0.065 shares (depending on fees). I find Revolut to be really good and it is also my chosen personal bank account.
If you’re in the UK, I would strongly suggest utilizing a Stocks and Shares ISA, which allows you up to £20,000 per annum to be invested and you pay no tax on any gains or income generated by these investments. In the USA, a similar investment vehicle is a ROTH IRA, however it has some restrictions, so make sure you’re familiar with these.
This fractional share will still gain value (or decrease in value) just as if you were holding a full share. It just enables you to enter the market at a lower and more affordable price point.
I hope this post has been of some help in helping you better understand basic investments and strategies. Make sure you REGISTER to avoid missing future posts.
Wishing you all the best in your financial journey.
Disclaimer: I am not in any way giving investment advice or advocating the buying of any specific shares or investments above, I am merely giving my opinion. The value of your investments can go down as well as go up, please make sure you are comfortable with the risks before you make any investment decision.