“I have £150,000 and want to invest it – where do I start?”
So, you’re new to investing and want to learn about different ways to invest your money.
I’m going to start with a hypothetical. Let’s say you’ve recently come into possession of £150,000.
Maybe it’s an unexpected inheritance, or a lottery win, or the money left over after downsizing your house. Or maybe you just found a briefcase in the street filled with cash (but hopefully not!)
You’ve heard that, at the moment, “interest rates are low” and don’t want it just to sit in a bank gathering dust over the next few years. You want to grow it sensibly in the background.
But where do you start? There’s lot of choice, a LOT of jargon, and everyone’s telling you something different.
In this article, I’m going to cut through all that noise and tell you the ways you can think about your money.
(Just to be clear – none of this is to be taken as specific financial advice, just some ideas about how to think about investing.)
The difference between “investing” and “speculating”
First, let me tell you what this article is NOT intended to do.
I am not pretending to know what the markets are going to do in the short term.
I’m not telling you that “this fund is better than that one”, or promising that “you can grow your money by X% every year by doing Y”.
People that make promises like that are people you should avoid. Anyone who claims they know what the markets are going to do in the future is lying.
Even Warren Buffet, once of the richest and most adept people in the world at all this stuff says himself that he doesn’t know what the markets are going to do. There is always uncertainty.
Trying to guess whether a particular company (or currency or commodity) is going to increase in value is speculating. It’s guesswork, basically.
There are a lot of investment funds out there promising very high rates of interest (and charging very high fees by the way… more on that below). These funds earn A LOT of money from investors and, too often, don’t deliver.
What I’m talking about here is investing. That means doing sensible things with your money which, over time, should deliver a positive investment outcome for you.
In the short term, some funds or investments might go down in value… that’s not the end of the world, it just means that you have to be patient and wait for the growth to happen over a longer period.
With that said, let’s dive into our example. You have £150,000 and don’t know where to start.
I’m going to approach this in phases:
Step 1: What outcome do you want, and when?
(Step 1a: Educating yourself on the basics)
Step 2: What level of risk are you comfortable with?
Step 3: What are the appropriate investments to get the outcome you want, when you want it, and with the right level of risk?
Step 4: Which specific products should you choose? (Based on things like cost, tax efficiency, etc.)
Step 5: Constant review, checking where you are against your desired outcome
This framework is how I help customers in exactly this sort of situation, and how you can think about it too.
(Incidentally, I’m always around for a free, no obligation chat if you want to talk about this in more detail!)
Step 1: What outcome do you want, and when?
I talk about this in pretty much all my articles. Whether you’re thinking about how to access your pension, how to approach your retirement, or this investment question, you should always think about what you want, specifically, out of your money.
The numbers are irrelevant. It’s what you’re able to do with them that matters.
Maybe you want to buy a house and have a target budget in mind.
Or maybe you want to spend five years sailing round the world before settling into a comfortable retirement. And what does “comfortable” mean here? How much do you need per month to live comfortably?
This is a crucial part of any chat I have with a new client – understanding them and their needs. It’s what drives the types of investment we go for.
And timing is important. When do you want to buy your house? When do you want that round the world sailing trip?
So, the first step involves getting as much detail about these desires as possible. For some people it can feel overwhelming, so start somewhere, however vague, and build more detail from there. It’s a process of thinking that can take a bit of time to emerge.
Step 1a: Educating yourself what everything means
This is the part of the conversation where I ask how much you understand about money and finance. Possibly, not very much.
That’s fine – I think it’s important for me to help you understand the basics. Some (arguably, most) of the people working in finance won’t bother with this ‘educating phase’, but I think it’s important.
How will you understand the decisions you’re making with your money if you don’t have a basic understanding?
So, here are some basics to get you started.
Stocks & Shares
“Stocks and shares” are when you’re buying part of a company or companies.
E.g. if you own shares in Google, you basically own a tiny part of Google.
There are two ways you make money with shares:
First, you might earn “dividends” on those shares. These are sort of bonus payments paid out to all people who own shares in that company, assuming the company is doing well.
Second, if the company’s value goes up (because the company overall is growing and performing well), your own shares will go up in value.
You can own shares in specific companies, or you might have money invested in a fund that collects together shares from a number of companies. Owning a fund is less risky because you’ll own a wide range of companies. If some don’t do so well, others hopefully will.
A simple way to think about it is that, generally, the more companies included in a fund, the less “volatile” (risky and jumping up and down constantly) the fund should be.
Bonds
The other main type of investment we look at are bonds.
This is where you are lending money, usually to a Government or a business, and earning back a rate of interest on that money.
They are traditionally safer, more predictable investments than shares, because you know what percentage return you’re going to get back on them,
(The best way to think about them is like IOU notes.)
(There is a whole bunch of jargon that I don’t want to cover here – things like index funds, mutual funds, exchange traded funds, stocks & shares ISAs, etc, etc.
Soon I’ll be releasing a jargon-buster that will explain all these phrases and more, in an easy-to-understand way – if you want it, sign up for my fun monthly newsletter here:)
Step 2: What level of risk are you comfortable with?
So, now you know what outcome you want and when.
How you get there depends on your relationship with risk.
This sounds super vague and airy fairy, but it’s actually very important.
Would you describe yourself as a fairly cautious person? Or happy to take bigger risks?
How would you feel about seeing the value of your £150,000 fall, albeit on paper, while you’re holding the investment?
Does the idea of losing a little or a lot of your money really stress you out?
These sorts of questions are really important in understanding what you’re going to be comfortable with. If you want really high growth and don’t mind the risk of losing money, then you might choose more of the higher risk investments in your portfolio. Incidentally, most people aren’t like this!
In practice, I pull together answers to a lot of questions like this to give someone a risk ‘score’ – a measure of how comfortable they are with risk – and use that score as a starting point for how their investments could look.
It’s a balancing act. You NEED to take some risk to get the growth you need but you probably don’t want to take TOO much risk. We never lose sight of the importance of getting this balance right!
Step 3: What are the appropriate investments to get the outcome you want, when you want it, and with the right level of risk?
This is about matching the outcomes to the risk.
A lower risk, more cautious strategy might include a big reliance of bonds, rather than stocks & shares. It might mean investing more in the established countries’ markets (North American, European, etc.) rather than developing markets which could be more volatile.
Again, there’s no guarantee with any of these numbers – if you’re super cautious, you can minimise your exposure to any losses and go for slower growth in the long term.
Obviously, if you take the time to educate yourself in more depth about all the different options, you can work out what balance of stocks & shares versus bonds to own, and decide which sorts of shares to invest in, or which bonds.
But where I make a difference (I hope!) is in helping you arrive at a good selection that will keep you happy (with the level of risk) so you can build towards your long-term objectives.
The two biggest things that ruin an investment are: (1) investor behaviour and (2) excessive costs.
Investor behaviour means letting your emotions get the better of you and making poor choices as a result.
If a stock’s value starts going up, you might get greedy and want to buy more, and end up losing money on that choice.
If a stock’s value starts going down, fear creeps in. You panic and start selling that share off. But investment is a long game. You have to buy and hold and wait for the value to increase in the long term.
So, short-term fear (or greed) is the enemy of long-term growth.
As for excessive costs, we’ll come onto that now…
Step 4: Which specific products should I choose? (Based on things like cost, tax efficiency, etc.)
Now, this is where a good financial adviser really comes to the party.
Even if you know what types of investments you want to make, there are so many ways to make them. Each have different rules, different costs, etc.
You could be investing in a fund that promises great returns, but also takes 1.5% of your investment’s value every year as a charge for running the fund.
Is that a lot? Maybe. You don’t know… it looks like a small number.
The truth is, there could be ways of achieving the same outcome over time, but with lower costs. E.g., you might be able to get a very similar result somewhere else and only pay 0.2% or 0.3% in costs. You’re therefore doing more with your money, making your £150,000 work harder for you. And the difference in costs could end up being thousands of pounds!
(Without wanting to sound like a total geek, costs are one of the areas I find most interesting. And yes, I know that might make me sound less “cool” than I actually am, but it’s genuinely true…)
So, an experienced financial adviser who understands the market and all the options will be able to navigate you through this.
Similarly, the rules on tax can be very complex and a good investment adviser will know how to help you avoid paying more tax than necessary on your investments.
At Brighton Financial, we do a detailed biannual review, where we assess the market. I’ll typically do this with one of our team of talented (and better-looking) paraplanners.
Step 5: Constant review, checking where you are against your desired outcome
Finally, a regular check-in on how you’re performing against your desired outcome is essential. Are you on course to reach that goal, whether it’s buying a house in ten years, a round-the-world trip, making sure you have enough for a safe and secure retirement, or something else?
Also, how are you feeling with your current level of risk? Maybe you’re feeling a little more stressed about your investments than you expected, so you might want to rebalance your portfolio a bit (making sure you come out of any higher-risk investments at the best possible time) with more safe, long-term bonds.
It doesn’t have to be in huge depth or detail, but you should be assessing what big life changes have happened that might change your outcome. Has a family member passed away and changed your plans in the future? Have you come into some extra money? Are you looking to retire earlier than you’d originally planned? I’m sure you get the picture.
The End…!
I hope this gives you a clear sense of how you might want to think about your investmentsWhere does a financial adviser come into this?
The way I like to see my work is that I look after the money that needs to look after you.
I know that might sound super cheesy, but the point is that your money is only as important as what you want to do with it, and how it makes you feel. Balancing those things, getting the best value for your investments, and doing it all in a tax efficient and cost-effective, is where a good financial adviser can pay dividends (pun intended).
More generally, some people talk about investments as a case of “timing the market”. But if you’re being really smart and looking at the long-term potential of your money, it’s better to think of it as “time in the market”. It’s about using the long-term power of growth over time to get the outcomes you want from your money.
Thanks for reading - feel free to email me any questions, and enjoy the coming of Spring!