Investments – Making the Most of Your Money
Welcome back to the Mortgage Money podcast. Today we’re talking about investments. With Jason Murgatroyd and Shamraze Ahmed.
What are Investments?
Generally speaking, we all have money somewhere where maybe put it in the bank, or building society. As a guide any money that you find you’ve got over and above what you need for emergencies and everyday spending is money that potentially you can invest. It is worth noting that any money you invest can go up or down in value. In a nutshell, your investments are looking at putting money aside into various types of investments to hopefully try and make more money.
Cash
The most common one, the one that everyone is familiar with, is cash. At some point, people will have an instant access savings account where you can withdraw your money, your convenience without penalties, but also receive a nominal amount of interest while you have the money on account.
Cash ISA
Another very popular cash investment is a cash ISA. Now we’ve covered this on a previous podcast, (so be sure to check that out for further details). These intaill cash deposits where you are entitled to the return of your money with any growth payable as interest. There are some restrictions with various deposit accounts, namely Fixed-Term, and not as accounts where making withdrawals within specified frames may carry penalties.
Foreign Currency Deposit Accounts
With these, your money is held in your desired currency and works in a similar way to the deposit account. This does carry an additional risk of movement within the exchange rate.
Fixed Term Securities (such as bonds)
There are many types these can be purchased directly, but also underpin a number of investment funds to add diversification that’s needed. With the bond you have a fixed amount of interest with a fixed redemption value and date.
The government, the government have their own version of a bond called a ‘gilt’. These don’t have amazing returns, but are backed by the government, which limits the default risk for an investor and favoured by the cautious investment funds equities.
Equities
Equities more commonly known as shares. You may have been tempted to invest directly at some point. Everyone knows someone who’s dabbled in these. You may already have an investment in investments exposed to equities without even knowing those that are paying into a pension may be surprised to know that the underlying investments makeup is mainly equities.
With equities, you purchase a share in a company in return for a dividend payment and capital capital growth, if any. The price you buy or sell the shares can increase or decrease depending on a number of factors, a few being economic policy, company’s performance, investor sentiment and also, as we know just recently, the coronavirus. This does make individual schedule an extremely risky, especially if you have little experience.
Property
Lastly, we have property in your residential property is an investment in itself as we have found property prices to increase over the years, which provides capital growth over the long term.
Property can also be purchased to let out. Buy to let properties are more and more favorable amongst investors with property appreciating at record levels, over the past 20 years. Rental properties, whether residential or commercial property, provide rental income as well as the potential for capital growth over the long term. Property should be approached with caution as there are costs associated with purchasing and disposing of property. In addition to purchasing property directly, it’s possible to participate through property funds. These are more complex than a single property transactions and again, advice should be sought.
Alternative Investments
These could include such things as art, collectibles and commodities.
Is there a Minimum I can Invest?
Investments will have within their own criteria, minimum and maximum limits that you can invest. Some savings require a minimum of £25/£50.
Is there a right time to invest?
Sure, yeah. There is no better time to invest. And yes, a downturn in the market can help make favorable conditions for certain investments. But this requires some caution. Contrary, some fixed rate investments will have less of a return due to poor market conditions. So the key words to remember are it’s not about ‘timing the market’, its about ‘time spent in the market’ that matters when it comes to these investments. Missing time spent in the market will reduce the growth of your investment considerably.
Let me put some figures on this for you…
Using the FTSE100. If you invested £1,000 in 1989 and invested for the full 30 years, you would be looking at £13,500 as a moderate return today. Let’s say you missed the best 10 days in the market due to encashment of your investment or trying to time the market and sell in early or taking your money out of the wrong time. You would only see a return of around £7,000. That’s £6,500 lost by not being in the market for the best performing 10 days.
Timing the market is difficult as multiple factors will affect the performance of an investment. Time in the market is best left to professionals such as fund managers who have the collateral and scope for movements within the market.
Why should I Invest rather than keep cash in my Mattress?
The value of cash erodes over time, this is due to inflation. Inflation is the rate at which prices of goods and services increase.
Here is an example: If we rewind the clock to the 90s a Mars bar would have cost you 30p. That same Mars bar today would cost you around 60p. Imagine you had £100 to invest in Mars Bars. So in the 90’s you would have been able to purchase 333 mars bars, today 166. Thats 50% less purchasing power, your buying power was eroded by the effects of inflation.
Money invested correctly can counteract the effects of inflation as your money has the opportunity to grow. So in conclusion, I would advise against cash under the mattress.
How has Covid Affected the Stock Market?
Covid has definitely had an impact on the markets. It also presents a time when we’re seeing businesses closing, we’re seeing businesses struggling. Underlying share prices of businesses which are struggling is starting to decline, which is unfortunate for the businesses themselves. This does however create great opportunities for anybody looking to invest in these times. The other interesting fact is mainstream banks are seeing a real upturn in the amount of deposit based savings that they’ve got. It’s purely and simply down to the fact that people just aren’t spending the money as they usually do.
We were discussing earlier, people are putting more into savings because they are not spending so much on fuel, they’re not going out or on holidays. That’s just the thing with all investments, there is always going to be some volatility involved with that investment. It’s just the nature of investments. And this is, as I said at the very beginning, it is somewhat of a gamble.
When you look at investments, you’re hoping to make a profit. But, depending on what happens in these markets, then potentially you can find yourself money going in the wrong direction. It’s going downward. And that’s what we call volatility. So when you are looking to place money into an investment, you’ve really got to be putting money in there that you can afford to lose. You should also be able to afford to leave it there as we mentioned earlier ‘time in market’. So you can ride these storms. That’s the nature of volatility. I still think with the covid situation, it still presents a fantastic time to consider investments due to the fact that stock markets do seem lower than they normally are.
What risks are involved in Investments?
So there are many risks for an investor as that are in general life. Some element of risk has to be taken in order to be rewarded.
Default Risk
This is a risk that an institution that holds your money, bank building society, will default and become insolvent. In the UK, we have services compensation scheme which would mitigate this risk in certain circumstances, but only to a specific threshold.So this should be reviewed prior to taking out any investments.
Capital Risk
This is more prevalent in equities and some property. The movement in price can cause negative effects as well as those desired positive effects. If a price was to fall below the purchase price you will face the risk of capital loss and it’s similar with property. Should we see a downturn in the property market? You will see prices depressed with the risk of negative equity if you have a property.
Liquidity Risk
Liquidity risk is more common when trading frequently. This is evident with property, especially commercial property, also applicable to shares and bonds where it’s harder to trade. If buyers are not entertained in purchases, then there’s market risk, the risk of interest rates, which can impact the market in general with investment bonds.
Interest Rates Risk
If interest rates fall, capital values rise and vice versa or the risks such as dividend risk specific to shares and equities. Then you have your inflation risk, which we discussed earlier.
The risk of not knowing how to Invest
Some risk can be mitigated, but limited by the risk of not knowing can be mitigated by using a financial adviser.
If I already have investments, how do I keep up to date on the performance of my investments?
It’s so refreshing to see people actually keeping track of the investments. That’s the key to investing really. These investments are yours and nobody else’s. So it lays firmly at your doorstep to make sure that you do know what’s happening with them. So many people don’t. They lead busy lives, just as we all do, and they forget about these things and they don’t have the finger on the button.
We look after our clients’ portfolios, they’ve got access to the portals so they can switch the computer and log on to the system. They can see exactly what their investments are doing that they’re seeing based on yesterday or the day before that. It’s pretty instant. You can get updates and we send you regular statements.
When you’ve got an adviser on hand, then your adviser is going to sit down with you once a year to go through these statements and help explain what they really mean and explain any technical jargon to you. Once you start these investments, it’s not a case of just leaving them and doing nothing about it. You’ve got to make sure you check in on the performance. And that’s exactly what your financial adviser will do for you.
Financial advisers have available to them a diverse range of tools and investment. Each investment is objective, specific. So taking a holistic approach, your advisor can formulate a solution specific for any change.
Investments may have restrictions on access to changes, but these will have been highlighted to you on implementation and would not be made if future changes were to be anticipated within the restriction period.
What if people’s circumstances change?
What we are good at doing as advisers is understanding clients’ risk profile is and making recommendations based on that. Circumstances change but before you change your investments you should take advice. You need to sit down with your financial advisor, because if you need to pull on your investments before you originally intended to and take your money out of markets and investments at the wrong time, it could be that there’s going to be a real negative impact on the total fund.
The other thing as well to mention is that some investments may not allow access, at least for a certain set period in time. So it might be that you’ve tied a lump sum of money up for a fixed five year period, in which case there may not be any access at all throughout that period. If you’ve got a portfolio of investments, which one do you take the money out of first?
It could be that some of your investments are ripe and ready to take money out of. Could be the others are not and it will be detrimental so again, it’s advice, advice, advice.
Why don’t I just plan my investments myself?
You can invest yourself. People tend to do it when it comes to deposit savings. But given all the risks of previously highlighted, the question would be how comfortable would people feel investing themselves? If it was that easy, then I think we would all be living in a world where everyone would be pretty well off.
The number of people that I have seen double in equities specifically and initially have made money but have had their money eroded due to buying and selling at the wrong time,
Why should I use an adviser?
I think with investments it is imperative to use an adviser because of the risks. Risk comes from not knowing what you’re doing. Let’s then let’s mitigate the risk of not knowing by using an adviser who does. An adviser will be able to invest your money in order to achieve your investment goals in the most tax efficient manner. Speaking to one of our advisers is part of an ongoing relationship. It’s just not a case of investing your money and leaving you to it.
An adviser is there to answer your questions. Are those all important changes? Eyes on when they are required? There are complex matters when investing not everybody will know how to deal with. This is why it’s imperative to use an adviser.
Here at CS Retirement Solutions we would be more than happy to sit down and discuss your individual requirements with you further.
