Have you hit a certain stage in your life where you find yourself thinking about money more than ever before?
Investing can be daunting and difficult to understand, which is why we put together “A Beginner’s guide to investing strategies”.
As a newbie investor, you will no doubt feel overwhelmed by all the investing options available to you.
This guide will help you to find an investing strategy that is right for your circumstances and financial goals.
Whether your goal is to:
- Grow your pension fund
- Support your child’s education
- Save for a mortgage or a holiday
- Start a business
- Pay off your debt, or
- Safeguard your future
… there is an investing strategy to suit your needs.
To help you understand what investment options can help you reach your financial goals, let’s explore the following areas >>
- What is investing?
- Why should you invest?
- Short Term Investments
- Long Term Investments
- Key Takeaways
What Is Investing?
Investing is the act of allocating money or capital into any endeavour with the expectation of positive return on your investment.
It isn’t just for “important people”. Everyone with any amount of cash can invest in whatever they like.
You can invest in stocks and shares, currency, commercial ventures, funds, p2p loans, precious metals or property. The choice is endless.
Investing allows you to build wealth by compounding money or capital over time.
Why Should You Invest?
Investing allows you to grow your money over time.
There are two ways to make money:
- You can sell your time for money working for yourself or someone else, and/or
- You can have your money work for you without having to do or go anywhere – also known as investing.
People start investing for many reasons, but the majority do it for these 3 reasons below:
1. Make your money work for you
Make your hard-earned cash work for you. Unfortunately, your cash savings in a bank won’t help you to grow your money. In fact, having cash in a bank over a long period of time is the worst thing you can do to build your wealth because cash won’t keep up with inflation and loses its value over time.
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. Things are generally more expensive than they were years ago. For example, in 1970 you could buy 10 loaves of bread for £1, today you can only buy 1 loaf of bread for £1.
2. Diversify your income streams
There is no job for life anymore and redundancies have become the new normal. By having several income streams, your whole livelihood won’t have to depend on one employer, allowing you to safeguard yourself against potential redundancies or unforeseen emergencies.
3. Pay off your debts quicker
Debt limits your opportunities to grow your money. After all, you can’t properly invest in your future if you have a mountain of debt you haven’t addressed yet.
Investing could help you to eliminate debt quicker, but do ask for advice if you are just starting out. We recommend that you start by tackling your high-interest debts first, then look to use investment returns to pay off your low-interest loans.
Short-Term and Medium-Term Investments
Short-term investment and medium-term investment are investments that are expected to be converted into cash or sold within the first 5 years.
Short-term investment tends to carry a little more risk than long-term investment because of higher rates of fluctuation, but they can also be more profitable.
Short-term investment can also be a way of securing money temporarily whilst earning returns on top of that. It can be a good way of dipping your toe into investments or building a diverse portfolio of both long-term and short-term income streams.
Some typical examples of short-term and medium-term investments are:
Through online peer to peer platforms like Leap Lending, you can expect to earn competitively high rates as you invest your money in personal loans. We connect you with extensively vetted borrowers to earn interest on personal loans.
Regulated by the Financial Conduct Authority, your investment is split across multiple borrowers to mitigate the risk. Investing in P2P could give you up to 5% returns - but it’s important you understand that as an investor, your capital is at risk.
Innovative Finance ISA
Invest in an innovative finance ISA (IFISA) and you'll enjoy the benefits of peer-to-peer investments, bundled up in a tax-free wrapper. You can invest up to £20,000 as part of your annual ISA investment allowance, which can be transferred from other investments.
A bond is a fixed-interest loan made by an investor to a borrower (typically corporate or governmental). Initially, a bond was referred to as a ‘fixed income instrument’ since bonds traditionally paid a fixed interest rate (coupon) but ‘floating interest rates’ are becoming increasingly common.
Bonds are used by companies and sovereign governments to finance projects and operations. When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors.
Long-term investment is an investment that is expected to be converted into cash or sold in 5+ years.
If the market is particularly volatile, you may need to wait until things turn around which could take upwards of 10 years.
When you invest for the long-term you must not panic when a stock's value drops and avoid selling just because the market looks bad. You just have to wait it out.
Some typical examples of long-term investments are:
Investing in Property
Buying a property to either renovate and sell, rent out for a monthly profit, or sit on until the housing market improves is a popular way to secure your funds.
Although we’re currently experiencing a buyer’s market in time things will swing back around. Because of the frequent changes in the market, investing in property is best as a long-term investment.
Direct property investment is when you buy and own the property as an individual. The value of the property depends on the market rate, but you can rent it out or live in the property in the meantime to still make a profit.
Indirect property investment is when you invest through a scheme where you don’t own the property directly, but you’ll get a share of the profits.
Investing in a Business
Whether starting from scratch or working with an established business, investing in a small business is a popular way to invest funds.
You can either buy equity or debt and will often be more emotionally invested and involved in the journey of the company.
Investing in Stocks and Shares
Stocks and shares investments are best for long-term financial planning because the stock market is highly volatile and hard to predict, having the time to ride out any losses is essential.
There are many reasons why people invest in stocks, but if your financial goals are to set aside money for a holiday or home renovations, stocks are not the way to secure your savings.
Investing in Bitcoin and Cryptocurrency
There are literally hundreds of different cryptocurrencies available, and all have different values. Think of them as a type of unregulated digital money although most are not particularly easy to spend, and all carry a high level of risk.
Following a dramatic increase in popularity a few years back, the bitcoin market initially dipped and only recently started rebuilding again. This is why bitcoin is best considered as a long-term investment, any fluctuations in the market can often be balanced out over time.
Investing in Collectibles
Collectible refers to an item valued for its rarity by collectors. Gold, jewellery, art, antiques or fine wine can all make interesting investments and might be a good way to diversify – but you need specialist knowledge to get it right, and you might spend a lot on storage, maintenance, and insurance.
Regardless of whether a short-term or long-term investment is better suited to you and your financial goals, eventually the interest you earn will earn interest of its own resulting in a snowball effect to your returns. This is known as compounding.
What Is Compounding and How Does It Work?
In simple terms, compound interest means that you begin to earn interest income on your interest income, resulting in your money growing at an ever-accelerating rate.
When your investment returns begin to earn money, and then those returns start to earn money, your investment can mushroom very quickly. Extend the time period or raise the rate of return, and your results increase exponentially.
Money is important when it comes to investing, but so is time.
The sooner you can put money away, the more you will earn in the long run. If you put away a £100 away at the age of 15 with a 10% interest rate, you’ll have over 100 times that amount by the time you reach 65.
Explore the table below to see how different rates would profit over time.
There’s no one way to get the best returns, so balance is key.
To secure a bright financial future you’ll need to balance the money, rate and time put into your investments. Start early, find a competitive rate and go for it.
Investment Strategies: Key Takeaways
We hope this guide helped you to understand investing strategies a little bit better.
Below are 3 main takeaways:
- Why Should You Invest?
Investing is key to growing your finances and diversifying your income. This will help you achieve your financial goals and support you during times of financial uncertainties.
- Difference between Short and Long Term Investment
The main difference between short and long-term investment are their lifespans. With short-term to medium-term investment, you’d expect to convert your investment into cash in less than 5 years, with a long-term investment it’s usually over 5 years.
- Compounding Effect
Compounding is the process of returning interest from your interest. To really notice the effect that compounding can have on your returns, make sure to invest as early as possible as time is valuable.
Want to learn more about P2P loans and returns it can provide? Invest with Leap today!