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Why I’m ignoring buy-to-let properties and investing in stocks and shares instead

James Reynolds — Mon, 07 Feb 2022 15:45:44 +0000

Investing in a buy-to-let property can be a great method to produce a steady stream of income. Although many people have earned a lot of money with this strategy, it is not one I intend to pursue.

Here’s why.

The cost of buy-to-let

First and foremost, there is a significant, up-front financial commitment. I’d need a huge lump payment or a hefty mortgage to purchase a rental home in the UK, where the average property price is currently over £260,000. Compared to investing in shares, which I can start doing with just a few pounds, the barrier to entry is almost impossibly high for me.

The expenses of owning a buy-to-let home are also an important factor. For rental investors, mortgage and stamp duty rates are greater than for homeowners, and there will be an annual operating expense. That’s not even taking into account the cost of finding renters in the first place. With stocks and shares, I may have to pay a fund management charge or an investment platform fee, but these are minor and predictable in contrast.

Finally, there is the time investment required. A buy-to-let property isn’t a true passive income investment. Renting out a house is a business and it takes time and effort to make it work.

When I buy stocks, on the other hand, I am also investing in the time and effort of the company’s leadership. They are in charge of the company on behalf of all shareholders. I don’t have to do anything.

There are still a lot of advantages to a buy-to-let property. In the long run, property values have outpaced inflation. There is also a reasonably consistent market for rental houses, implying that investors will be able to generate an income stream at any time.

If I had the capital to spend, a buy-to-let might be a good option for me. But unfortunately, I don’t.

Alternative opportunities

Instead of purchasing real estate, I’m investing in firms that have global presence and portfolios of very well-known brands.

One of the companies I’m already invested in is Berkshire Hathaway (BRKB: NYSE). This conglomerate is owned and run by none other than Warren Buffett. Because of that, I have the benefits of a company that owns Apple, Coca-Cola, and Bank of America, and is managed by one of the most successful investors of all time.

However, one disadvantage of buying individual stocks and shares over a buy-to-let, is that I do not influence how a company is run. Owning a buy-to-let is far more work, but with that work comes control.

If I change my mind

Property can be a lucrative investment and if I ever think of adding it to my portfolio, I would invest in Lloyds Bank. Lloyds has been helping to build rental properties up and down the country and could see a significant return on investment in the years to come.

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James Reynolds owns Berkshire Hathaway (B shares). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

1 FTSE company and 1 penny stock I’d buy to beat inflation in 2022

James Reynolds — Mon, 10 Jan 2022 07:03:35 +0000

The data is in, and unfortunately higher inflation is here. Under normal circumstances, a small amount of inflation is considered good for an economy. But central banks aim to keep that rate at around 2% per year and right now, the consumer price index in the UK suggests that prices are rising at 5%+. That’s the highest seen since 2011. To protect the value of my savings, I need to invest in assets that will either generate a higher rate of income or appreciate in value.

But what options do I have? Some of the safest investments out there are 10-year government bonds. But the current interest rate on these bonds is just 1.4% so I’m not currently considering them.

Buying dividend stocks

Another option is to build a portfolio based on dividends. These payments are portions of a company’s profits paid to investors over the course of the year. Right now, several FTSE 100 companies are paying staggeringly high dividend yields: 8%, 10% or even 13%. Unfortunately, yields as high as these are often unsustainable over the long term. They won’t be worth much either if the share’s value goes down over time.

Yet I see some higher yields as being much safer. I would add tobacco company Imperial Brands to my portfolio. It pays an 8.5% dividend yield and has remained profitable while increasing revenue over recent years, even as its share price has fallen. IMB shares trade for 1,631p today, down 58% since 2017. There is a risk that the share price could continue to come down as smoking becomes less popular. But IMB has undertaken several cost-cutting measures over the past few years, including exiting all but its five most profitable markets. On top of that, IMB has consistently paid some form of dividend for more than 20 years, even through the pandemic.

I think, as a hedge against inflation, the benefits outweigh the risks for me.

But my portfolio needs diversification. For that, I’d focus on capital growth by investing in a company I think has great potential.

One great penny stock

Penny stocks are companies whose shares trade for less than £1. Most of these stocks don’t have much potential, but there are a few gems hidden among them. I think that one such gem is Idox group, a software engineering company based in the UK. Its shares currently trade for 67.97p, up 34% from this time last year. Right now, Idox builds software platforms for public sector institutions. Most recently it delivered a new data collection/collation system for a Scottish council. If it is able to leverage that success into deals across the country, I can only see the share price rising.

The biggest danger here is the company’s very thin profit margin. Idox is profitable at the moment, but there is a risk that it could fall into unprofitability once again.

Even so, I think the upside potential is worth the risk, and I would definitely add it to my portfolio.

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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here’s how I’d invest £2000 in the stock market right now

James Reynolds — Mon, 25 Oct 2021 08:40:35 +0000

When I only have small amounts of cash on hand, it can be difficult to know how best to invest it. Do I spread out what I have for safety or do I concentrate it to maximise potential profits? Given that the stock market go either way, here’s how I’d plan to invest £2,000.

Fear and Greed

It’s important to note that, while we try to invest logically and with a clear head, humans are emotional creatures, and are often at the whims of two powerful feelings: fear and greed. These emotions might have once helped me survive in the wild, but in the world of investing they cost me money. Whatever choice I make with this £2,000 must take them into account.

In the grand scheme of things £2000 isn’t a lot of money. If you’re like me and you have had to work in low-paid or unstable work for most of your adult life, that can be hard to hear. I’ve worked very hard for a long time to earn this money, and I know what I’ve had to give up to save it. So, I usually have two competing instincts to contend with.

Invest heavily in a high-risk, high reward venture to maximise the upside (greed). Or…
Be cautious and hold on to any value (fear).

I think that the best option in this situation is a compromise. I would divide my capital in half and invest one chunk in riskier growth stocks, and the other in safer companies. This way, I will be able to take advantage of any sudden growth in the high-potential stocks I choose. But I’ll also feel that I didn’t overextend myself if there’s an unexpected market downturn like, let’s say… a pandemic.

Companies

For the low-risk portion of my capital I think it’s best to choose one or two solid companies that have been around for a long time and pay a dividend. The dividend will somewhat compensate for the lack of growth. For this I’d choose either a bank like Lloyds or a supermarket like Tesco as neither is likely to go out of business soon.

For the higher-risk category, I would look to the US and think of which companies have great growth potential. They still need to be solid businesses with great management. After all, I’m investing, not gambling.

For this I think a tech company is the best way to go, as profit margins are high and the future of innovation really lies with them. Microsoft has some excellent fundamentals and has been run spectacularly for the last decade. My other choice for this portfolio would be Apple. It has maintained steady growth this century and has continued to prove the bears wrong at every turn. Regular stock buybacks will also really put my investment to work over the long haul. If it’s good enough for Warren Buffett, it’s good enough for me.

Of course, any form of investing comes with risks. I need to remember that these are companies I plan to hold for the long term and that I should be absolutely certain of my choices before I invest. £2,000 isn’t much, but it could pay greatly if I invest it wisely today.

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James Reynolds does not have a position in any of the shares mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple and Microsoft. The Motley Fool UK has recommended Lloyds Banking Group and Tesco and has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 lessons I’ve learned from watching Warren Buffett

James Reynolds — Wed, 13 Oct 2021 16:35:39 +0000

Warren Buffett is recognised as one of the greatest investors of all time, and for good reason. He became a self-made billionaire at the age of 53 and, still commands captive audiences wherever he speaks.

I made a lot of mistakes when I first started investing. I watched the market and listened to the news every day because I felt that that was what was important. But instead, it was overwhelming, stressful and, most importantly, expensive. Eventually I realised that, if I want to be successful, I should learn from the master. After devouring all the letters, books and speaking events I could find, these are three of Warren Buffett’s key rules I follow when considering stocks for my portfolio.

1. Know what you’re investing in

Warren Buffett refuses to invest in businesses he doesn’t understand. His reasoning is that you have to understand the business to know if a company is being run well. I agree with this thinking. I know nothing about banking, so now I don’t invest in banks. What I am passionate about is renewable energy. I understand the challenges and opportunities in that sector, which means I can make more informed decisions about the stocks I add to my portfolio. It can be frustrating missing out on big growth stocks, and Warren Buffett received a lot of criticism for not investing in Google (Alphabet) or Facebook. But he didn’t understand how they made money and didn’t want to take that risk.

However, he was one of the only big investors who bought Apple when it was undervalued and has since made $100bn from that investment.

2. Margin of safety

This is the most difficult step when choosing a stock. Warren Buffett only buys a company when it is undervalued, providing a ‘margin of safety’ in case it doesn’t go up by as much as he had hoped. To do this, Buffett waits for the price to go down before buying and continues to buy more as the price falls lower and lower. I found this very scary at first. But, if I’ve chosen a company well, this is how I’ll make the most profit in the long term.

3. Think long term

Warren Buffett is not a trader, he’s an investor. He buys stocks with the aim of holding them ‘forever’. That is where real wealth is built. Thinking long term may be the most important rule I’ve had to learn. It’s not exciting or flashy, and I won’t be rich tomorrow. But investing isn’t a get rich quick scheme, and planning for the long term is how I’ll continue to approach my portfolio. Buffett became a billionaire in his 50s, so I still have many years in which to catch up.

Conclusion

If there’s one theme in all of Buffett’s teachings, it’s patience. Warren Buffett once said that the stock market is a system for transferring wealth from the impatient to the patient. In my early days, I often grew over-excited watching a stock shoot up in value, and would buy in, hoping to make a quick profit. Reacting to the market like that cost me a lot of money. I’ve since learned to ignore the noise and plan for the long term, just like Warren Buffett.

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James Reynolds does not have a position in any of the shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool UK has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

No savings at 40? 3 myths that hold investors back

Paul Summers — Sun, 28 Feb 2021 07:29:12 +0000

While the stellar recovery in share prices over the last few months has generated more interest in the stock market, I’d bet that many in the UK who could start building a decent nest egg will still refrain from doing so. Here are what I believe to be some of the most prevalent reasons for this and why these ‘myths’ are simply wrong.

1. “I’m not rich enough”

The idea that in order to make money from investing, a person already needs to be wealthy is completely false. These days, it’s possible for anyone to begin investing by opening a Stocks and Shares ISA and contributing as little as £25 a month.

Sure, that still requires sacrifice. However, automating savings in such a way that this amount is moved to the ISA on the same day a person gets paid takes the sting out of it. After a few months, it may not even register.

Of course, buying shares every month will still cost money in the form of commissions paid to brokers. Again, there’s a way of minimising the pain involved by taking advantage of that broker’s regular investing service. Here, shares are purchased on set days every month. Depending on the broker, this can actually reduce fees to zero!

2. “Investing is too hard”

Actually, investing doesn’t need to be difficult at all. Like most things, it depends on the way we approach it.

Yes, becoming a successful active investor who picks their own stocks can take effort and a willingness to do ongoing research. Regardless of the potential benefits to one’s net worth, that clearly won’t be everyone’s cup of tea.

Fortunately, there’s more than one way to make money from the stock market. One alternative is to buy a group of ‘active’ or ‘passive’ funds. This reduces risk by spreading money around more stocks and requires minimal maintenance on the part of the investor.

In fact, I’d go so far as to say that the hardest part of investing is behavioural. In other words, it’s about learning to manage one’s emotions, specifically greed and fear, and not allowing them to dictate financial decisions. As experienced market participants will know, doing as little as possible is often the best strategy.

3. “I’m too old to start”

To stand a better chance of becoming wealthy from the stock market, it certainly pays to begin as early in life as possible. This is because a longer time horizon allows someone to benefit more from the ‘magic’ that is compounding (earning interest on interest).

That said, there’s a good chance someone in middle age with no prior savings at all can still do well. Investing £25 per month for 30 years — a realistic time period for someone in their 40s — could see them accumulate a little over £28,000.

Although likely requiring more risk, this end result would be even higher if this person were able to achieve an annualised return above 7%. As someone in my 40s, this is something I’m trying to do myself. My personal strategy is to invest a good proportion of my money in small-cap companies. These have a better chance of growing at a faster clip than your typical FTSE 100 giant.

Put simply, age should not be considered a barrier to successful investing. Like most things, the key is to get started!

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

4 minimalist investing tips for 2021 and beyond

Paul Summers — Wed, 27 Jan 2021 09:15:52 +0000

Buying and selling shares can be as engrossing an endeavour as we want to make it. Given all the other fun things we can do with our limited time on this planet, however, I find the idea of ‘minimalist investing’ very appealing. Accordingly, here are a few suggestions for making it feel less like a burden in 2021.

Minimalist investing 101

Restricting oneself to a set number of holdings could be considered the best place to start.

Naturally, the actual number will vary from person to person. That said, we all have a limit over how much time we can devote to researching, buying and tracking our investments. My ISA portfolio, for example, never has more than 20 stocks in it. Any more than this and I’d feel overwhelmed. Moreover, too many stocks might dilute the impact of my big winners!

For some people, even 20 separate companies will feel like too much. In this case, they may want to consider buying a small number of cheap, exchange-traded funds. These simply track an index like the FTSE 100, give instant diversification and require next to no ‘maintenance’.

Ditch the app

It’s been incredibly easy to spend more time than necessary staring into a screen recently. It’s for this reason that I’ve deleted all investing-related apps from my smartphone. The logic behind doing so is that I’m then less compelled to check my portfolio. As a result, both my homescreen and my brain are less cluttered.

Now, removing these apps might feel uncomfortable at first but persistence is the key to breaking any habit. It’s no different from keeping unhealthy food out of the home. By removing the ‘cue’ (the app icon), I minimise the likelihood of a ‘behaviour’ (habitual portfolio-checking) occurring. Setting daily time limits on apps is a less severe option.

Go automatic

One thing I’ve learned in many years of investing is that I can’t time the market consistently. As such, the vast majority of my buying now happens automatically on the same day every month via my broker’s regular investment scheme. This helps to remove emotion from the process. It also saves me money. Some online share-dealing platforms charge zero commission on monthly purchases! Over time, this could have a dramatic impact on my returns.

Another minimalist investing idea is to automate savings. This involves instructing a bank to transfer a fixed amount over to a Stock and Shares ISA every month. In addition to removing the need to do it manually, scheduling this transfer to happen the day after being paid also ensures building a nest egg for the future is prioritised over frivolous spending. As the saying goes, “Pay yourself first”.

Don’t ‘read all about it’

A final way to adopt a minimalist approach to investing is to reduce the amount of news we consume.

Clearly, this idea is easier said than done in the midst of a global pandemic. However, I think the important word here is ‘reduce’. Attempting to eliminate all news flow from one’s life is not only difficult but could cause anxiety. Being selective is key.

For me, this involves seeking news from only one or two reputable sources and treating everything else as noise. If this sounds too restrictive to you, consider saving your regular news binge for times when the market isn’t open.

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Where I’ll be saving and investing my money in 2021

Edward Sheldon, CFA — Sat, 26 Dec 2020 09:56:24 +0000

Those with money to save and invest face no shortage of options heading into 2021. Not only are there many saving options (ISAs, pensions, etc), but there are also lots of asset classes and investment structures (funds, ETFs, investment trusts, etc.) to consider.

Here, I’m going to reveal my saving and investing plan for 2021. And look at where I’ll be putting my own money next year.

2021: where I’m going to save

Let me start by explaining where I’m going to save in 2021. I have a simple plan.

First, I plan to contribute £4,000 to my Lifetime ISA to max out my annual allowance. This will get me a near-instant bonus of £1,000. Then, I’ll put my next £4,000 in savings into my wife’s Lifetime ISA (she’ll thank me later). By saving £8k into these ISAs, we’ll pick up government bonuses of £2k, taking the total amount saved to £10k.

After that, I’ll split my savings between my Stocks and Shares ISA and my Self-Invested Personal Pension (SIPP). The advantage of the Stocks and Shares ISA is that it provides a high level of flexibility. This year, for example, I pulled £10k out of my SA to help with a house down-payment. That kind of flexibility is valuable.

The advantage of the SIPP is that it’s extremely tax-efficient. Normally, contributions into a SIPP come with tax relief. However, I actually make contributions directly from my limited company as I’m a freelancer. These are treated as a business expense meaning they reduce my tax bill.

This LISA/Stocks and Shares ISA/SIPP combination works very well for me. I get the bonus top-ups from the LISA, flexibility from the Stocks and Shares ISA, and tax savings from the SIPP. I’ll point out that I use Hargreaves Lansdown for all three accounts, which makes it easy to manage my money.

Where I’ll be investing in 2021

In terms of where I’ll be investing, my preferred asset class is stocks. Over the long-run, stocks tend to generate excellent returns of around 7-10% per year. With that kind of return, money grows quickly.

I don’t just invest in UK stocks however. These days, I am very much a global investor. I mostly invest directly in shares. However, I also invest via funds, ETFs and investment trusts.

In 2021, there are three types of stocks I plan to buy.

Large-cap growth stocks. I already own Apple, Microsoft, and Amazon. I’d like to buy more. I’d also like to add some other growth stocks to my portfolio, such as Adobe, Shopify, and Nike.
Large-cap dividend stocks such as Unilever, Diageo, and Reckitt Benckiser. These provide me with portfolio stability. And I can reinvest the dividends they pay to compound my wealth.
Disruptive small-cap growth stocks. These kinds of stocks are riskier but they have higher growth potential. One small-cap I want to buy more of is Upwork. It operates a freelance employment platform. With the ‘gig economy’ expanding rapidly, I think it has enormous potential.

I’ll point out that I’m not going to buy these kinds of stocks at any valuation. I’ll be waiting patiently for attractive entry points. I’ve found over the years this is the best way to make strong returns from investing in the stock market.

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Edward Sheldon owns shares in Apple, Microsoft, Amazon, Unilever, Diageo, Hargreaves Lansdown, Reckitt Benckiser, and Upwork. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, Microsoft, Nike, and Shopify. The Motley Fool UK has recommended Diageo, Hargreaves Lansdown, and Unilever and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investing during the pandemic: here’s what I’d do

Thomas Carr — Wed, 21 Oct 2020 16:26:07 +0000

It’s hard enough investing at the best of times. But investing during the coronavirus pandemic feels like a minefield. There’s so much uncertainty around. And with uncertainty, comes risk. To try and make investing during these uncertain times a bit easier, I’ve come up with a few principles that should improve our returns.

Investing in quality during the pandemic

These are testing times for virtually every company. Most companies will suffer to some degree. But the strongest may survive and prosper. These are companies that have strong brands, pricing power and high profit margins. They’re the household names that we stock in our fridges and the supermarkets that we shop in. They’re the things that we can’t do without, even in a pandemic.

As well as having competitive advantages, the best companies also have strong balance sheets. They have huge cash balances that they’ve saved for a rainy day. This cash can be used to support the business while it’s going through choppy waters. Companies that don’t have adequate cash will be forced to either borrow or raise equity. Either way, this could be costly for shareholders.

As well as having stacks of cash, the strongest companies also have little debt. When crises hit, highly indebted companies will find they can no longer cover their interest payments. Companies may be forced to issue more debt just to cover their payments, with the debt potentially spiralling out of control.

Avoid stricken sectors

Successful investing during the pandemic is predicated on us being able to filter out the riskiest investments. Some sectors have been hit harder by coronavirus and the subsequent lockdown. I’m talking about the travel and hospitality sectors in particular. They’ve had months of revenues wiped out, in many cases leading to giant losses. This looks set to continue at least until next spring. For the companies that operate in these sectors, things could get a whole lot worse before they get better.

While it may appear that dramatic share price falls have created buying opportunities, I would leave these for only the most adventurous investors. The pandemic may have created permanent changes in consumer behaviour. Even if it hasn’t, some companies in troubled sectors have taken on so much debt just to survive that it’s going to be eating into profits for years to come. I believe investing in these sectors is inherently more risky and more likely to lead to investment losses. That’s why I’d avoid them during the pandemic and instead look to areas that have been relatively unaffected.

Look for value

Another way to reduce the risk is to focus on undervalued shares that appear cheap. The value of the shares provides a buffer of protection against further price falls. If the underlying company is of sufficient quality, there’s only so far its share price is likely to fall before its value becomes attractive and its price recovers. Simply put, buying quality shares when they’re improves the likelihood of achieving superior returns in the long run. Sooner or later, such share prices catch up with reality and reflect a company’s true value.

This is a simple set of rules. But it’s one that could help me to successfully invest during the coronavirus pandemic. I just need to make sure I stick to them.

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Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Britons are saving money like never before. But where’s the best place to invest a lump sum?

Edward Sheldon, CFA — Sat, 04 Jul 2020 11:38:40 +0000

You might think that in the current environment, savings levels across Britain would be well down. After all, millions of people across the country have either been furloughed and taken a pay cut, or lost their jobs completely.

However, in reality, it’s quite the opposite. Believe it or not, Britons are saving money like never before. According to Bank of England data, households’ deposits increased by a record £25.6bn in May, following strong increases in both April (£16.7bn) and March (£14.3bn). By contrast, in the six months to February 2020, household deposits rose by an average of just £5bn per month. Clearly, many people have been able to save money during the lockdown.

If you’ve saved up a decent amount of money in 2020, that’s great news. But what do you do with it now?

You’ve saved money: what now?

The best place to invest a lump sum will depend on your financial goals and risk tolerance. Of course, before you think about investing a lump sum, it’s important to ensure you’ve taken care of personal wealth management basics. Have you paid off high-interest debt such as credit card debt? There’s no point investing your money if you’re paying a ton of interest.

And have you built up a robust emergency fund so that you have plenty of cash available for emergencies? This is important in the current environment. These are the things to take care of before investing your money.

Short-term vs long-term goals

If you’ve sorted the basics, the next thing to do is think about your financial goals. Are they short-term or long-term focused?

If they’re short-term focused, your best bet, in my view, is to keep your money in either an easy access savings account or a fixed-term savings account.

You won’t get a great interest rate with either option unfortunately, because interest rates are abysmal at the moment. You might be able to pick up a rate of around 1% if you’re lucky. But at least your capital won’t be at risk. That’s important when saving for short-term goals.

Building long-term wealth

If your goals are more long-term focused (five years-plus), your best option remains the stock market, in my view.

The stock market is volatile in the short term. However, in the long run, it tends to produce returns of around 7-10% per year, on average. That’s far higher than the returns from other asset classes, such as cash savings and bonds.

It’s possible to do much better than that too. For example, one of my favourite investment funds, Fundsmith, has returned about 19% per year over the last five years. You can invest in funds like this effortlessly these days through platforms such as Hargreaves Lansdown and AJ Bell.

Your returns can potentially be tax-free too. Invest within a Stocks and Shares ISA or a Lifetime ISA (LISA) and you won’t pay any tax on your gains.

Of course, stock market investing is riskier than keeping your money in the bank. It’s important to be fully aware of the risks.

I always say that the best approach to investing in the stock market is to invest bit by bit. This strategy can reduce the risks of investing at a market high and help you build your wealth more effectively over time.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Saved money over lockdown? Here’s how to build your wealth now

Edward Sheldon, CFA — Wed, 01 Jul 2020 09:23:13 +0000

2020 has been a tough year for many Britons financially. As a result of coronavirus lockdowns, millions of people have either been furloughed and taken pay cuts, or lost their jobs completely. However, there are some people that have actually been able to save far more money during lockdown.

With spending opportunities reduced significantly, many of those who are still in full-time employment have found themselves with more money to save each month.

This is reflected in recent data from the Bank of England (BoE) which shows that households’ deposits increased by a record £25.6bn in May (following strong increases in April and March). That compares to a pre-Covid-19 six-month average of around £5bn per month.

If you’ve saved money over lockdown, that’s great news. But what do you do with it now?

Where to invest savings now

Assuming you’ve already paid off any high-interest-rate debt and sorted an emergency fund, it could be a good idea to invest your savings for the future.

Leave all your savings in a bank account or a Cash ISA and it won’t get you very far. According to the BoE, the effective interest rate on new time deposits was just 0.87% in May. That’s a truly abysmal rate of interest. If you’re earning that kind of interest rate on your money over the long term, you’re only going to go backwards in real terms (i.e. once inflation is factored in).

Invest your money in the stock market, however, and there’s a good chance you’ll build your wealth up over time. Historically, the stock market has delivered returns of around 7-10% per year, on average, over the long run, which is an excellent return. That’s well above the long-term rate of inflation, and far higher than the returns from savings accounts.

Investing has never been easier

Investing in the stock market is incredibly easy these days. Open an account with a reputable provider, such as Hargreaves Lansdown or Interactive Investor, and you can literally be investing within minutes.

My advice would be to open a tax-efficient account, such as Stocks & Shares ISA (where all gains are tax-free), or perhaps even a Lifetime ISA if you’re under 40 (this comes with 25% bonuses on contributions but has restrictions on withdrawals). Then start building a diversified portfolio that contains a mix of UK and international stocks.

Build your wealth

If you don’t want to worry about picking stocks yourself, funds can be a great way to invest in the stock market. One of my favourites is Fundsmith Equity. This is a global equity fund that’s returned about 50% over the last three years. Exchange-traded funds (ETFs) and investment trusts can also help you get diversified exposure to the stock market with minimal hassle.

Alternatively, if you don’t mind doing a bit of research yourself, consider picking your own stocks. This approach to investing can be higher risk. But it can also generate higher returns. For example, had you invested £2,000 in online fashion retailer Boohoo five years ago, that money would now be worth around £30,000.

Just make sure you think long-term. In the short term, the stock market can be volatile. It’s important to be aware of the risks. In the long run, however, stocks tend to produce fantastic returns for investors.

The post Saved money over lockdown? Here’s how to build your wealth now appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Hargreaves Lansdown and Boohoo and has a position in the Fundsmith Equity fund. The Motley Fool UK has recommended boohoo group and Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.