Ten ways to invest
There are many ways you can invest, and it can appear daunting when you’re starting out. But in fact the rise of online platforms and passive investing mean it’s easier and less costly than ever before.
Previously, the only way a private investor could directly buy shares was through a stock broker. This can still be done, but now there are also online platforms that allow you to build a portfolio of stock market investments.
Pros: To be your own fund manager, many experts advise you to back businesses you feel you know well and to do your research. If you do your homework, buying individual shares can lock in good dividends and offer capital growth.
Cons: You need enough shares to insure against backing losers, and mental strength when a share falls sharply, either to ‘stop loss’ and sell, or hang on for the longer term. It’s important to build a portfolio of shares to spread your risk.
You can read a more detailed article on how to invest in the stock market.
Open ended funds
Pros: Some of the best returns come from active managers with strong track records working in more specialist areas of investment, such as overseas markets or small and micro-cap companies.
Cons: The majority of actively-managed funds do not justify their costs by delivering a better performance than a low-cost fund or exchange traded fund (ETF) which tracks the same investment area.
Pros: Traded like shares, trusts can borrow to invest, while the share price’s discount to its asset value can narrow, boosting returns. More suitable than open-ended funds for property.
Cons: The flipside of borrowing and of discount movement is that losses can be magnified too. Buy-sell ‘spreads’ and 0.5% stamp duty build in costs that act as a drag on returns.
Pros: ETFs allow you to invest passively, with no manager, in an index tracking any market, territory or asset, from foreign currency to oil to Japanese equities to infrastructure. The choice is huge and costs ought to be low, with no stamp duty. They easily allow you to build a diversified portfolio and some passive managers will build a portfolio for you in seconds based on a risk profile you provide.
Cons: If you don’t choose the option to allow the manager to build a portfolio for you, then you have to make the key decisions on asset allocation. Costs and their transparency may vary between providers.
Pros: Government and corporate bonds offer an intermediate risk level, with a certain outcome if held to maturity, and possible gains (or losses) if traded. Strategic bond funds promise diversification. The ETF options include inflation-linked bonds.
Cons: Rising interest rates are bad for government bonds unless held to maturity, and for government bond ETFs. Corporate bonds become risky in an economic downturn and bond funds can be expensive.
Pros: Peer-to-peer (P2P) online platforms offer healthy returns for investing in the debt of small businesses. They promise easy access to cash and rigorous credit-checking of clients, with lending spread across a wide basket of borrowers.
Cons: The industry is still in an early phase and has not been tested by an economic downturn, in which lenders want their cash but borrowers may be feeling squeezed. There are some limited ‘safety fund’ guarantees but no regulatory backstop. Risks are therefore high.
Pros: Venture capital trusts invest in around 20 small expanding companies, and offer tax breaks of up to 30% for investors. The Enterprise Investment Scheme (EIS) has a similar incentive while a seed capital version offers 50%.
Cons: Any venture portfolio will include companies which stall or fail, so high risk is built in and inevitable. Investments may have to be held for three or five years, with incentives to reinvest not cash out. The tax tail should not wag the investment dog.
Pros: Property is an important diversifier, and it can generate strong returns whether held in an ETF, a fund (preferably closed-end), or a peer-to-peer platform. Buy-to-let investing benefits from rising property values and rents, and from being unconnected to the stock market.
Cons: The commercial property market cycle means investments can be mistimed, and getting money out can sometimes be difficult. Property of all kinds looks a rosy prospect in good economic times but risk should not be underestimated.
Pros: The foreign exchange market enables investors to manage risk by ensuring their investments are not too dependent on the health of a currency. A wide range of ETFs has made forex investing accessible and reduced risk.
Cons: This is territory for the more sophisticated investor prepared to surf on the fast-moving tides of global currency movements, and to take a view on the big economic forces which move markets.