Whether you’ve just started saving or already own a sizeable nest egg, investing your money can generate huge rewards. What’s more, with inflation hovering around 2.7% and most saving accounts offering a meagre interest rate of 1-2%, there’s never been a better reason to seek higher returns. But where should you invest your hard-earned cash? And is playing the stock market a wise choice or a risky bet?
The case for investing
Inflation. It’s a word we often associate with slightly dull Bank of England announcements, but it’s also one of the biggest reasons to save. As inflation rises, the cost of goods and services go up, and our purchasing power diminishes. The knock-on effect is that the £1,000 sitting in your bank account today won’t buy you nearly as much in one, two or three years’ time. So, one way to beat the weakening power of our savings is to look for returns that outstrip inflation. And that’s where investments come in.
Before we explore the best places to invest your money, it’s also worth recapping on what Einstein called the ‘eighth wonder of the world’ – compound interest. Put simply, this is the handy way investment returns usually generate future gains. Start investing now and the compound interest you earn over the next 20 years could exceed the extra contributions you make in later years. Once you understand the benefits of investing your money instead of keeping it in cash, the case for developing an investment strategy becomes even stronger.
Where should I invest?
Investments is a broad term that covers a dizzying array of different assets and investment vehicles. Today people invest in everything from commodities and bonds, to art, vintage cars and even fine wines. But by far one of the best investments to make, according to experts, is in stocks and shares. Investing in individual shares and funds through the stock exchange has typically generated annual returns of at least 7%1 over the past three decades.
If you’re feeling nervous about Investing in the stock market for the first time, you’re not alone. A recent survey found that only 26% of people hold savings in a stocks and shares ISA. What’s more, as Dr Kristina Vasileva comments, “Very few people want to enter the stock market even though this has typically been the biggest source of returns. Instead they will stick with bank account savings even though the rates have been far below inflation for a long time.” So, if you’re thinking of investing in stocks and shares, the benefits are clear. Although, of course, any type of investing involves an element of risk, and past performance doesn’t guarantee future returns.
What’s more, if you invest in a stocks and shares ISA, you don’t have to pay any tax on your returns or dividends. You also don’t need to declare any of the income you earn from your investments on your tax return at the end of the financial year. The annual ISA allowance for 2018/2019 is £20,0002, which means the average person can invest a healthy chunk of their annual savings, tax-free.
Which stocks and shares should I invest in?
There are many different routes you can go down when investing in companies, funds and bonds. But, first it’s worth considering your risk appetite. Investing in a bundle of different companies,
through a fund or index tracker, avoids any major shocks to your investment pot if an individual company goes bust. However, if you’re young, single and with few financial dependants, the potential returns of investing in individual shares could outweigh the risks.
Another common approach for minimising risk is investing in funds with a mixture of different asset types. By spreading your money across shares, bonds and real estate, for example, these funds help reduce your exposure to significant shocks across different markets.
When investing in funds, it’s also worth deciding how much you want to rely on experts to steer your investment decisions. This typically boils down to a choice between active and passive funds. An active fund is one which is actively overseen by a team of managers who rely on research and forecasts to inform their portfolio. But, having a manager take the reins also comes with a higher cost. Passive funds are generally cheaper as they aren’t managed by an expert fund manager but mirror market-wide indexes or portfolios instead.
Which platform do I use to invest?
With so many different financial and investment platforms out there, it can be difficult to know which to use and where to invest. As with anything, it’s best to go with a provider than offers maximum transparency and investment options. Legal & General, for example, lets you compare and pick your own ISA funds, giving you greater control over how you build up your nest egg for the future.
The opinions expressed in this article are those of the individual experts and may not be representative of Legal & General. Legal & General are committed to bringing you a wide range of views on the best ways to save and spend your money: https://blog.legalandgeneral.com/saving-and-spending/.