It’s not controversial to say that investing is easier than it ever has been. We’re all constantly walking around – or even going to bed with – a device that is capable of making countless investments at any time of day, at the touch of button.
At the same time, it’s just as fair to say that building a strong investment portfolio – one that is diverse and strong enough to get you to your financial goals, without pushing you to a level of risk that will keep you up at night – is just as hard, if not harder, than it has been since the stock market first opened.
Why? Because the ease with which we can actually make an investment simply doesn’t align with the difficulties involved in making good investments. Not all investment opportunities are created equal but, these days, so many investment opportunities are equally available to new and seasoned investors.
For those who are starting from page 1 of their investment portfolio, this muddies the water and makes for a daunting – and, potentially, off-putting – prospect.
But making wise investments is still possible, you just need a certain amount of caution and experience on your side…
Can a ‘Normal Person’ Invest?
Absolutely, and many, many people do have growing investment portfolios tailored to the risks they’re willing to take, and the financial goals they have for the near and distant future.
The idea that investing is somehow reserved for those charging bulls of Wall Street, or the steeliest of international businesspeople, is an unfortunate one. One of the benefits of the many different website and apps out there that bring investment potential into the palms of our hands is that they are rewriting the ‘character’ of the investor, although, ask any financial advisor, and we’ll tell you that that’s about as far as their benefits go.
Investors are normal people. You don’t need yachts in the mariner or penthouse apartments to build a portfolio, so don’t fall prey to the idea that you’re just not the sort of person who can or will invest.
What are the Benefits of Making an Investment?
Investing offers far more benefits to the ‘average investor’ than you might think. Here are some of the most significant advantages to consider.
- You Avoid Letting Your Money ‘Go Stale’
We all want to have a healthy amount of money saved ‘for a rainy day’, but leaving a healthy amount of money to just sit and wait is not a good long-term financial strategy. True, we can protect our finances and work to ensure that our main income stream is not interrupted, but how about making more of what we do have?
Investing is a way of making your money go further, and serve you more in the future than it does right now. True, you do need to save a certain amount in the first place in order to be able to make strong investments,
- An Additional Source of Income…
Most of us won’t quit our day jobs to become full-time, professional investors, primarily because doing so – and making a serious income from your portfolio – requires a high level of tolerance for risk. The importance of understanding your risk tolerance is something we will explain in more detail below.
The point is that, while most people do not consider investments to represent their primary source of income, a strong portfolio can represent a valuable source of additional income. This passive income can be generated through interest (for instance, if you have invested money into an ISA), or through dividends.
- Or Focus on Growing Long-Term Wealth
From investing more proactively into your pension to focusing on investments that are capable of delivering long-term, healthy returns on investment, you can take real steps toward securing your family’s future, and minimising (or overcoming) your concerns for the future.
The Key Types of Investment
There are many different investments out there. This can be daunting to beginners but, when looked at from the opposite perspective, it’s actually a big reassurance. Investors have a wide enough range of choice that they don’t need to feel compelled to make an investment they’re not comfortable with, or which doesn’t align with their tolerance for risk.
Yes, the sheer number of investment opportunities open to you can be overwhelming, but that is exactly why we would only ever recommend you turn to an experienced financial advisor for advice, rather than diving straight into the deep end.
With that in mind, here are the key types of investment out there.
An ISA, or Individual Savings Account, is probably the most familiar item on this list, although they may not be the first thing you envision when you think of investment.
Unlike purchasing stocks or bonds, investing your money into an ISA feels (and looks) a lot like putting it into a regular savings account. The key difference, of course, is that your money doesn’t sit idle in an ISA, as it does in a savings account.
Broadly speaking, an ISA enables your money to generate tax-free interest payments. There are different types of ISA out there, and you can open more than one (although there are limits for each tax year on how much you can invest into ISAs altogether.
Stocks and shares ISAs, for instance, are designed to multiple investments in one place – a little like a bushel of apples. They are very tax-efficient (since you pay no tax on them at all), so investing a number of long-term investments into a stocks and shares ISA is a great idea.
Cash ISAs are a good way to invest your savings if you don’t have much of a stomach for risk. In these, you simply earn tax-free interest (which can be fixed or variable). Some ISAs will not allow you to withdraw your money for a specified length of time, while others allow withdrawals at any time – although most will stipulate that multiple withdrawals will cause the interest rate to drop.
Innovative Finance ISAs are a little different. They cover peer-to-peer loans (either to companies or individuals), which are significantly riskier than the two options listed above, but offer the potential for a much higher ROI. The FCA has made Innovative Finance ISAs much safer in recent years, but there is still a chance that investors could lose their money to borrowers who default on those loans.
You need a higher tolerance for risk, which is rewarded with a (potentially) high, tax-free return on that investment. It’s important investors are well-informed, and that they understand the best- and worst-case scenarios.
As the name suggests, Lifetime ISAS are designed for long-term investment. Anyone between the ages of 18-40 can open a lifetime ISA and, each tax year, invest up to £4,000. They can be used to store cash or stocks and shares, or both at the same time. Until you turn 50, the government will contribute 25% each tax year as a bonus.
The key thing to remember is that Lifetime ISAS are not designed to be used as ‘rainy day’ funds when you need a little extra. Withdrawing outside of the permitted circumstances will incur a withdrawal charge of 25%.
The permitted circumstances are:
- If you want to use the money in your ISA to fund your first house purchase.
- If you have been told that you have less than a year to live, due to a terminal illness.
- If you have turned 60.
Each tax year, a maximum allowance for ISA contributions is stipulated. This maximum allowance applies to the sum total of your ISA investments – so, if you have multiple ISAs, you cannot invest more than this amount across the board.
Growing a sizable pension is one of the best things we can do for ourselves and our loved ones during our working lives. While most of us will have an employer make regular contributions to our pensions, and many pension schemes will see those investment decisions made on your behalf, but there will always be considerable benefits available to those who take it into their own hands, and make strong investments from early on in their working lives.
Workplace pensions, for instance, often offer the opportunity for investors to choose where their money goes. Alternatively, you can set up your own pension – make regular investments into it – and choose exactly which investments your money is put into, in order to boost your retirement fund down the line.
You can read more about how we can help with Pensions and Retirement for more information.
An Enterprise Investment Scheme is there to help business owners raise funds from private investors, by offering tax incentives to the investors. There are limits to how much money a business can generate in a single year through an EIS – and to how much it can raise in total through the EIS and any other venture capital schemes they may choose to pursue.
Investors will only see the promised tax reliefs if the business they invested into adheres to the rules of the EIS.
Investors can claim on income tax relief and capital gains tax relief for the money they invest and gain from the investment, along with capital gains tax relief if they reinvest that income generated by the initial investment.
There are some strong benefits to an EIS, but, again, it is not without its risks. If the business fails to meet the scheme’s requirements, you lose those benefits.
Venture Capital Trusts are another option for businesses looking to raise capital, which offer tax benefits to those who are willing to invest into them. VCTs are utilised by small start-ups or new businesses that require a cash boost in order to get going. This does, of course, mean that the risk is quite high – higher than it would be if you were investing in established, larger companies with liquid stock.
VCTs require a minimum investment length of five years, so they’re not the solution if you want to see a fast ROI. The tax benefits are significant, however (up to 30% income tax relief, as well as tax-free dividends and capital gains) so VCTs are often utilised as a great complement to a broader portfolio.
Bonds can be divided into two camps: on-shore and off-shore. When you’re looking for tax efficiency and a strong, long-term investment opportunity, offshore bonds are generally going to be your best option. What many people do not realise, however, is that offshore bonds are not limited to a small number of professional investors. Instead, the ‘average investor’ can see strong returns (and excellent tax advantages) from the right offshore bond.
These tax advantages stem from the fact that bonds are non-qualifying, whole of life policies, meaning that they share a lot of similarities with insurance contracts while offering significant tax advantages – and potentially high returns.
One of the most significant benefits to using bonds as investment vehicles is the fact that, if you reinvest the income generated by the bond, that income won’t be subject to income tax. And, because they are not considered to be income generating assets, you won’t need to spend time each year reporting to HMRC through a self-assessment.
Other tax advantages include the potential to avoid capital gains tax (true in the majority of cases), and a 5% withdrawal allowance each tax year, which is seen as a return of capital (not income). This allowance is cumulative, so any that goes unused one year will roll into the next. You can also take advantage of ‘top slicing’, which will help to lower the rate of tax that needs to be paid on these chargeable gains
Exceeding this allowance will mean that you need to pay income tax on the additional amount, but, as you can see here, careful planning creates plenty of scope for a strong, long-term investment plan.
Offshore bonds are regarded with some scepticism by unseasoned investors, and seem to occupy something of a ‘grey area’ for many people. But, far from evasive, a trustworthy offshore bond is simply a tax efficient, long-term investment option for anyone willing to make space for ‘the long game’ in their investment portfolio.
How do You Know Your Risk Tolerance Level?
Your propensity (and financial ability) to take risks is a very personal thing, and it should be a major factor to consider when it comes time to begin investing. Yes, high risk investments can promise eye-popping returns, but there is very little point in you making the decision to support your financial goals through investing if there’s a voice in your head screaming, ‘No!’
It’s worth considering your ability to tolerate financial risk as a separate consideration to your capacity for risks. You may have a very strong financial footing right now, and you may well be able to afford some of the riskier investments that those with a thinner financial cushion; this means a greater capacity for risk. Your capacity for risk should not override your tolerance for it, but it can help to inform it.
There’s no one measurement or number you can put on risk tolerance. It comes down to you, your background, your goals, and your natural temperament. There are natural born risk takers out there, but there are also plenty who prefer a more measured approach.
Really, the only way to work out what investments are really best for you (not just financially, but from an emotional standpoint, too) is to talk things through with someone who holds more experience, more knowledge, and an impartial view of all your options.
Investing doesn’t mean standing in the stock exchange, shouting down a phone to ‘Sell!’ or ‘Buy!’, or even nervously tapping in and out of an app to watch that bar rise and fall over and over again. Investing is something that can fit quite happily within a much broader financial plan, and building a strong investment portfolio with your future financial goals in mind can align with the time and money you’re willing to put into investing, and the level of risk you’re prepared to live with.
Still, it’s a daunting prospect. You can get in touch with us to start talking about how we can help you to find the right investments, and working toward your goals bit by bit.