How To Invest Money UK

Looking for how to invest money UK? Well congratulations! You are already in the minority who have even considered investing and are looking to build a better and safer financial future.

When you invest money you are trying to achieve two things: hedging against inflation and capital growth. What does that mean? Supposing you had £10,000 of savings in the year 2000, do you think it would have the same buying power today? Of course not.

Money loses value over time. Savings accounts used to be the solution to this but now with interest rates at a historic low you are unlikely to protect against inflation with a savings account and so investing might be a better option.

The there’s capital growth where by investing in assets that generate a return you can hopefully make money while you sleep.

That idea of assets is important because to achieve financial freedom you need more assets than liabilities. An asset is something that makes you money while liabilities are what cost you money.

Learning how to invest basically means understanding what assets are going to make you money, which also means understanding the risks involved with investing. You need to balance out upside risk – the chances of making money – with the chances of losing money. Quite often a greater risk means potentially greater returns but also a high chance of loss.

Understanding Assets And Liabilities

A perfect example is a house. People generally think real estate is a good investment because you buy an asset that makes you money through increasing value and rent payments if you let it out.

But a house can also be a liability – what if the boiler breaks down or the roof needs repairing. On the other hand, none of these are likely to completely wipe out your investment like a stock going bankrupt or a cryptocurrency crash as you can get buildings insurance (an additional cost) to protect the fundamental value of the property.

To achieve true wealth you need to understand this concept inside and out. Cars are a perfect example of a liability because a car’s value is slashed the minute it leaves the showroom. Then there’s the upkeep, fuel consumption and insurance costs on that.

So when you see rich people driving around in sports cars there’s a good chance they are not actually wealthy. This is a concept called lifestyle creep. When you don’t have money you learn to make do and you can be pretty happy. But as your income grows you grow your lifestyle too – increasing your liabilities. You start drinking fine wines, driving a sports car and get lots of expensive memberships and subscriptions. That means your liabilities match your income and you don’t feel wealthy and you don’t feel safe.

This attitude starts when you first learn how to invest money UK – growing assets and avoiding liabilities. Don’t spend on big boozy nights out and put the money you would have spent into assets.

So what are good assets? This largely comes down to your attitude to risk.

Different Types of Assets To Invest In

Almost anything you can own can be an asset – from wine to internet domain names – and we call these “asset classes”. In general you’re probably best sticking to the classics – stocks, and/or property.

But experts do say the best way to invest is to invest in what you know – so if you’re a wine expert and can pin down the upside potential of a wine in no time then you’re probably better off with that than learning about the stock market.

The best assets should meet a variety of factors:

  • Upside potential – you are likely to make money
  • Low downside risk – you are unlikely to lose money
  • Liquidity – you should consider how easy it is to cash out and get your investment back
  • Time – You probably don’t want to spend too long managing your asset because then it becomes a job – potentially a low paid job if you invest a lot of time for low returns.
  • Fees – minimise the costs of buying and selling (and even holding) your assets
  • Low minimum investment – this depends on your situation but it helps if you can invest in increments, especially if you don’t have that much money to invest. Buying a house is probably going to set you back £100,000+ while stocks can cost less than £1.

Investing in Stocks and Shares

Stocks and shares are the obvious example of a brilliant asset class. The stock market has been the single greatest wealth creation tool in history. Every decade it increases – and that is despite some significant falls. So far the market has always recovered.

Maybe some day it won’t, but for more than 100 years it has. What are stocks and shares? A stock is a company you can buy shares in, and shares are literally pieces of that company. So if the company goes up in value – usually driven by its profits – then so should your investment.

Companies may also offer dividends where they redistribute some of their profits to shareholders, which means you can keep the capital value of your investment while still making an income on the shares.

Learning to invest in shares takes a lot of work. There are ways around that such as by buying ETFs (see below) or using a managed investment service like a robo-advisor or wealth portfolio manager.

Investing in Exchange Traded Funds

Now picking stocks is hard work. However you’ve probably heard that its good to spread your risk by investing in a variety of stocks. Exchange Traded Funds – known as ETFs – are like baskets of hundreds of stocks. Buying one share in each of these stocks would cost a lot. Instead by buying shares in an ETF you are just buying a fraction of lots of stocks.

That means you can capture the performance of a whole market which doesn’t carry as much risk as a single or just a few stocks. The most popular Exchange Traded Funds tend to track markets like the FTSE 100 and the S&P 500 – which basically represent the top companies in the UK and US economies respectively.

If you wanted to invest in tech stocks but not pay the $1000+ for a single share in Amazon, Google or Tesla, you just buy a share in a NASDAQ ETF.

But investing in these funds can go a lot further than that. ETFs can cover all sorts of different types of unsual asset classes like water and oil.

Have you ever heard about a crash in oil prices and wished you could fill a warehouse full of barrels for when the price goes up? Well remember the point about what makes a good asset. To do that you would have to rent a warehouse, buy a huge amount of oil and transport it there, run the risk of leaks and fires and then deal with how to sell it.

An oil ETF on the other hand lets you buy in why the price is low just through a broker – which could be an investment app on your phone. The ongoing fees for ETFs tend to be very low in the fractions of a percent. That’s because they aren’t actively managed like a hedge fund or investment trust so you aren’t paying an expensive fund manager.

When you’re ready to do so there are enough buyers and sellers in the market worldwide that you can nearly always sell shares in funds at the touch of a bottom.

ETFs can also cover metals and more abstract investment concepts like “ageing populations” and biotech.

What’s more is that these unusual asset classes can be held in a stocks and shares ISA so your investment returns are tax free.

Investment Trusts

Another level up from ETFs is managed funds like investment trusts. These portfolio funds tend to have a set of managers responsible for choosing what to invest in. That may sound great having your own fund manager who invests for you but research has shown that most fund managers struggle to beat the market.

While fund managers will often have a good run they can then run into difficulties when their golden strategy no longer works. Neil Woodford is a classic example of a “star” fund manager whose reputation dived when his flagship fund underperformed and tanked when investors got scared off. On the other hand Warren Buffet is a kind of fund manager through his investment company Berkshire Hathaway.

Meanwhile those fund managers charge fees – normally around 1 – 2%. That may sound small but can really eat into your returns – especially in a poor market where your gains are small. Those fees also compound, so they get bigger and bigger as your investment grows.

There is a widely-held belief that ETFs are superiour to investment trusts because they will always match the market. A fund manager on the other hand may well beat the market sometimes but is also likely to match or underperform the market. Add in their fees and you might be better off with a cheap ETF.

Real Estate Investing

Real estate is one of the most classic investments – especially in the UK where we are obsessed with owning property. It makes perfect sense to buy a property and rent it out. The property should go up in value and you get rent payments in the meantime. There’s no shortage of tenants and you can even outsource the management of the property to an agent so you just watch the returns roll in. As far as attitude to risk is concerned, many people see this as a low risk investment, especially compared to the stock market.

But as we’ve already covered, real estate can also be a bad idea. You have to buy a property and look after it – which can be difficult enough in your own home. Then you have difficulties with tenants. While some landlord insurance policies offer rent protection these normally come with lots of terms and conditions which means you probably won’t be able to claim in a lot of situations. Troublesome tenants can often end up with eviction orders and bailiffs. That can be expensive, stressful and time-consuming.

Then there’s the diversification argument. As you have to buy a whole property it is very difficult to build a varied portfolio.

But there is another way to invest in real estate without this hassle. Real Estate Investment Trusts function like ETFs for property. Again they tend to be quite diversified. A lot of brands you will recognise are actually real estate investment trusts including a lot of self-storage units and student halls of residences.

What’s The Best Way To Invest Money UK?

These are some of the classic tried and tested ways when looking for how to invest money in the UK. But no method offers guaranteed positive returns for the risk and so you should aim to build a diversified investment portfolio and seek financial advice if needed. Ideally you should aim for a mix of investments to manage that risk.

Buy shares in the stock market but also some more stable assets like real estate or commodities like oil.

It’s also be a good idea to keep a lot of cash in your portfolio. That may seem counter-intuitive as the whole point of investing is to get rid of your cash in order to buy assets. But in the event of a large crash, cash suddenly becomes an asset.

If all your other investments have gone to 0 then cash means you have some emergency money and also the opportunity to buy lots of assets while they are cheap. Just think if the market crashed tomorrow and you had a whole pile of cash – you could buy at the rock bottom price and make a good return just on the stock market returning to normal levels. That’s a concept known as “buying the dip”, although it isn’t without risk as you never really know when the market has bottomed out.

Keep Your Safety Net

How to invest money UK safely? Before you even start looking for potential investments, you need to make sure your finances are bullet proof. You need to work out your monthly expenses and then keep three to six months of expenses in cash in case of disaster.

How you qualify your expenses depends on your risk profile. If you don’t mind a bit of risk then you might cope with just three months of essential expenses – rent, bills, food, etc.

But you should also consider if you should actually have six months or more and include your actual expenses – so dining out, subscription services etc.

Then there’s your investment outlook. Investing is a long term strategy. Investments are very different to short-term trading. Traders take advantage of very minor fluctuations in the market using leverage – essentially borrowing money to amplify their returns and losses. That’s a whole different game and probably not something you should be doing with your savings unless you like a lot of risk.

Invest for the long term and you are more likely to manage that upside and downside risk. Investments rise and fall in the short term but a good asset should keep appreciating over time.

So what does long term actually mean? 5 years to 10 years is a good bet. If you need your savings to buy a house or have a child in a year or two then you might decide an investment is not right for you because you can’t tolerate much risk at the moment.

But if you don’t have big expenses coming up and are really only investing your surplus cash then some good investments could do very well if left for a long time. It is over the long term that investing really pays off because of the compounding effect.

Stewart Vickers
Latest posts by Stewart Vickers (see all)