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10 Tips For Improved Investing

ByDave Stopher

Dec 18, 2017 #finance, #money

Investing well can make you lots of cash and allow you freedom and the chance for a better lifestyle. So, where do you start?

These ten tips are here to help you compare investments and make money.

  1. Investing is not only for high rollers

To start dabbling in the stock market, it isn’t necessary to have a bank balance as big as Warren Buffet does.  A majority of investment funds these days accept lump sums ranging from £500 to £1,000 or £50 monthly deposits.  However, you need to have a strong enough stomach to be able to watch your savings decreasing in value in addition to increasing.

Investing is a long-term game.  Therefore, you need to be prepared to have your money locked away for five years at least, and ideally for ten years or longer.  Therefore, it best suited for individuals who have long-term financial goals, like a child’s education or saving for retirement, instead of for buying a new car or a deposit on a house.

  1. Be cautious

It can be quite nerve-wracking to gamble your money in unpredictable markets.  However, it has been shown repeatedly by history that equities over the long term outperform cash savings.  That isn’t too surprising if you consider the paltry returns that are being offered at the moment by savings accounts and banks.

On a fixed cash long-term Isa, they average only a 1% interest rate, according to Moneyfact, a financial website.  That is less than what the current inflation rate of 1.6% is, which means that in real terms a majority of cash savers are losing money.

  1. Investing has some tax advantages

This tax year savers are entitled to up to a £15,240 yearly tax-free allowance on money that they invest through Isa shares and stocks.  On April 6, the allowance will increase to £20,000.

You won’t have to pay any capital gains tax on the interest paid or income earned on the investment made with an Isa.  In addition, a 10% flat rate is paid on dividends, which in particular benefits higher-rate taxpayers, since they would have to pay 32.5% otherwise.

  1. Consider what you would like to invest in

Traditionally, cash has been viewed as the asset class the has the least volatility.  Your money is protected and is safe through the Financial Services Compensation Scheme in case a building society or bank goes bust.  However, as shown in our second point, inflation can erode its buying power, so in real terms, you could end up actually losing money.

Fixed interest investments are loans made to governments(called gilts or government bonds) or companies (corporate bonds), that offer reliable yet modest returns.  Traditionally these have been viewed as having a lower risk compared to equities.  This sector can be invested in through a bond fund.

Shares, which are also called equities, provide investors with a stake in the company.  Shares have a tendency to increase in value whenever a company is doing well but decrease when it isn’t.

It is also possible to invest in commodities like gold, oil or steel or in commercial property funds.

  1. All of our eggs shouldn’t be put in one basket

If all of your hard-earned money is funnels into one company’s shares and then the business ends up tanking, you will lose everything.  What you should do instead is diversify.  That involves dividing your lump sum up across your portfolio and investing parts of it into various global markets, asset classes and companies.

While some markets are decreasing, there will be others that are increasing to help cancel your losses out. How you end up spreading out your money will depend on what your attitude is towards risk. If you are a cautious investor, then you shouldn’t invest a lot of your money in equities.

  1. Considering investing via a fund

Shares can be purchased directly.  However, that can be risky, hard to do and expensive. For a beginning investor, usually, it is better to invest via a collective fund, since they provide an affordable way for purchasing various assets without needing to be responsible for making investment decisions on your own.  With the most popular investment fun types, like an open-ended investment company (OEIC) or unit trust, you can purchase units so that your money gets pooled with that of other investors.

A fund manager makes use of his or her expertise to purchase and sell either shares or bonds for you in order to maximize your returns.  You will have to pay a fee to invest in the funds, but since the cost is being spread out among many investors, it ends up being a lot less expensive than it would be investing in those same shares on your own.

  1. Take your time to make sure you select the right fund

Thousands of different investment funds are available, so it is very important to do your research in order to choose the one that is best suited for the level of risk you are comfortable with and that can meet whatever your financial goals are.  These funds will invest in over 30 sectors, that are categorized into different asset classes (fixed income or equities, for example); geography, for instance, Asian emerging markets or small companies in the UK, for example; sector type, like property or technology; and investment style like income or growth.

A fund’s performance should be monitored over the long term, such as five years, instead of checking to see whether a fund performed well last year or not.  Keep in mind, that you are in this for the long term.

  1. Consider tracker or passive funds

Tacker or passive fund, which ‘track’ or mirror global stock market index performance, are run by computers instead of managers.  This results in them being a lot less expensive.  The jury is still out when it comes to whether active funds that are run by a manager or passive funds provide better returns in the long run.

A management fee is charged by all tracker funds so that guarantees they will underperform whatever market they are following. However, the expenses are low, down to 0.15%, which means the return will match the index quite closely.  Most active funds, by comparison, are 0.75% or higher.  Therefore, your returns need to be equal or higher than that.

  1. To save money, purchase through a DIY investment

It cost money to invest in a fund, in contrast to opening up a savings account.  The most expensive option is to directly purchase units from a fund manager.  It is easier and cheaper to purchase through a fund platform or supermarket.  They allow you to review, manage and hold all of your investments in the same place.  There are DIY investment platforms that are offered by companies like Bestinvest, Interactive Investor, and Hargreaves Lands that either charge a percentage of the investment or a flat fee.

For small investors, usually, a platform charging the lowest percentage-based fee will be the cheapest.  If you have a large sum to invest, most likely being charged a flat fee will be better for you.

  1. To minimize your losses, invest on a regular basis

Choosing the perfect time for investing in order to beat the market is impossible to do.  You can improve your chance to maximize your returns by investing money into funds regularly.  For instance, you could do this once per month, instead of investing everything at one time.  That is called dollar-cost averaging.  Fewer shares are purchased when the market is increasing but when it is falling you can purchase more at a cheaper price so that the overall risk and costs average out.