I have long been a believer that no one should wait until later in life, to get their head around investment options. Wealth management goes hand in hand with investing, but many of us fall into the easy investment options, which sit on the blurred line between savings and investments, like saving accounts and cash ISAs. These are supposedly the safe, comfortable options, but do you ever feel like you’re missing a trick, and have you taken the real interest rate into account?
The real interest rate, is the interest rate you are getting on your investment minus the rate of inflation. If you want your money to be worth the same each year, you need to be getting an interest rate that tracks inflation.
With a current UK inflation rate of 2.8%, your standard savings account, which probably pays you 1.5%, is actually giving you a negative real return at -1.3%. This means that although you don’t look like you are losing money, you have less spending power, which, over the course of 10 years, will equate to a loss of 13%. If we add tax into the equation, a basic rate taxpayer, need to find a savings account paying at least 3.5% a year to match inflation. A higher rate taxpayer needs to find an account paying at least 4.66%.
6 or 7 years ago, you could get a cash ISA with 8% interest. We were being rewarded for taking the safe investment options. However, the 2013/14 cash ISA year is offering its best rates of interest, at around 2.5%, giving you a negative real return of -0.3%. Given that the Bank of England expects inflation to exceed 3% later this year, is it time for you to bite the bullet, and try to understand what other investment opportunities there are out there?
When you buy shares on the stock market, you are buying a stake in that company, and need to approach the transaction in that manner. Gain a full understanding of what the company does, how it makes money, and what factors could affect its ability to do so. Investing in companies is a highly risky activity, you always risk taking out less money than you put in. So unless you are willing to study the companies annual reports and financial statements, you should steer clear of buying shares in individual companies. There are several virtual trading sites, that allow you to keep track of a virtual portfolio without spending any money, while you are learning the ropes. If you have no experience, then it’s a good idea to keep a virtual portfolio for at least six months before investing real money. Unless you are consistently up on your initial investment, and you understand why, then you’re probably not ready for the real world.
Investing in Index Trackers
An index tracker, or index fund is a simple investment fund that mimics the performance of the stock market. So, if the stock market goes down, you lose your money, if it goes up, you gain. If you do not have the time or understanding to invest in individual shares, then index trackers could be a good option for you. Some of the risks with index trackers are buying and selling them at the wrong time. A way to counteract this risk, is to make your investments over time. This means that certain purchases will be worth less than others, but overall, you spread the risk and your portfolio should go up with the market. You also need to make sure that the fees you are paying to make transactions, are not wiping out your profits.
As always, none of the above is intended as advice. I merely want to encourage you to do your own research, so that you invest your savings wisely.