How to invest your money for the future

Whether you’re saving for retirement or have a particular medium-term goal in mind, such as a big purchase or a dream holiday, you’ll want to explore the best options in each case for investing your money for the future.

Cash savings tend to deteriorate in value as inflation rises above interest rates, but investments can often improve your chances of beating inflation.

So if you want to make sure your money is working as hard as it could for you, here are some popular types of investments you might consider.

If you want a helping hand, find out how a wealth manager can help you invest your money.

Learn more: financial adviser vs wealth manager

Equities (stocks & shares)

Many people invest in the stock market without realising it.

If you have a pension pot, its assets will be held largely in equities (i.e. stocks and shares) – but most people don’t think much about this (even if they should).

The stock market is what people often think of when they want to invest.

It’s where you can buy shares in companies and sell them later, hopefully at a profit.

Anyone can buy them once a company makes them available, in what is known as an initial public offering (IPO).

Not all shares are made equal. Some pay dividends, allowing you to earn when a company generates a profit, and some come with voting rights that give you a say in how the company is run.

You could opt for Exchange Traded Funds (ETFs), which are a collection of investments traded on the market that tend to track an index.

But if you want to choose the companies you’re investing in, particularly for ethical investments, you might find it easier to buy individual stocks.

Stocks are risky investments.

You could lose a lot of money, or even all of it, if the value of your shares goes down or the company folds.

The value of your shares can change daily, so your investment strategy is key.

Some investors buy and sell in rapid succession, trying to score quick wins, but this is a high-risk and labour-intensive approach best left to the most experienced.

A more usual strategy is to hold a stock for a long period of time, riding out the peaks and troughs for an overall upward trend in value.

Corporate and government bonds

Bonds are lower-risk, lower-growth assets that are generally used to offset the risk of equities and anchor a portfolio with some stability.

Companies and governments issue bonds as a way of raising the capital they need – so they are essentially loans where you are the creditor.

When you take out a bond, you’re essentially loaning the government (or corporation) money that you’ll get back on a specified date, plus interest (known as a coupon).

Government bonds are also known as gilts, and tend to be the most reliable bonds (though not necessarily the highest paying).

Bonds are lower-risk than stocks and shares, but more risky than cash.

The main risk with bonds is that the issuer may default, i.e. not pay you back the money.

If this happens, you have what are known as ‘junk bonds’.

To avoid buying these poor-quality bonds, you can check the investment grade, which is a rating provided by firms such as Standard & Poor, or Moody’s.

With bonds, the interest you receive tends to be a bit higher than the interest you would earn on a savings account, and your money is usually inaccessible for a few years.

Sometimes bonds may pay such a low rate that they are little more than ‘holding pens’ for sums of money, used as a ‘least worst’ alternative to cash.

Peer to peer lending

Another way to loan money in return for interest is through P2P lending platforms.

Because the sites avoid using the banks, the interest rates can be higher.

However, these are riskier than bonds, because you’re relying on the site to judge whether borrowers are likely to default.

Your money is also not protected by the Financial Compensation Scheme, so you could lose it all.

Choosing a lender that has a buffering fund against defaulters can reduce your risk, so do your research carefully.

Remember that you shouldn’t consider P2P to be just a high-paying savings account – it is a risky investment, so treat it with the same caution as you would treat stocks and shares.

High-interest savings account

You probably already have a savings account, but usually it’s possible to find one that offers a better interest rate.

Often you can find the best rates as introductory offers: e.g. you get paid a very high rate for the first year, only for it to reduce after that.

By keeping on the ball and moving your money around to chase the best deals, you can often beat the returns you would otherwise get on cash savings.

In fact, this experiment showed cash savings beating equities over 18 years, provided this move-around strategy was followed.

Property

Property has been called Britain’s favourite investment.

It is certainly true that house prices have tended to rise over the past 40 years, tempered only by the occasional collapse.

The downside of property investment is that it is not very liquid – you can’t get at your money easily as it typically involves selling the house or flat – and it’s also very high-maintenance (if you’re buying to let, for example).

You also have to spend a lot initially, if you’re buying a whole property, and will usually need to qualify for a mortgage.

On the upside, there are two clear ways to make money from property: the increase in value of the property itself, but also the money you can make by letting the property out.

However, recent tax changes on second properties have squeezed profits for landlords, so margins are a lot tighter for some than they used to be.

There is an alternative option for investing in property, which doesn’t involve the huge initial outlay required to buy a house or flat.

This is to invest via an Exchange Traded Fund (property ETF) or Real Estate Investment Trust (REIT), which allow you to buy shares in property investment companies.

These are traded on the stock market, so essentially are equities with a strong link to the property market.

OEICs and Unit Trusts

Open-ended investment companies (OEICs) and unit trusts (mutual funds) offer a way to pool your money with others and invest in a range of assets, both in the UK and overseas as offshore investments.

The fund manager will invest in everything from bonds to shares to property, and they’ll manage the portfolio.

The value of your shares (in an OEIC) or unit (in a unit trust) will go up and down depending on the value of the assets in the fund.

They’re called ‘open-ended’ because the company or trust can issue more shares or units whenever they want to.

OEICs and unit trusts are generally less risky than traditional stock market shares because they spread the risk across lots of investments.

Also, a professional manages the fund for you (for a fee).

With OEICs and unit trusts, you can usually sell your shares/units at any time, making them liquid, but some will only allow you to sell them at specified times, such as once a year or once a month.

Alternative investments

These types of investments include private equity, hedge funds and venture capital, along with more unusual assets such as fine art, wine (discover how you can start investing in wine here) and antiques.

Alternative investments are unregulated, which does make them even riskier than other high-risk assets.

However, in some cases they can generate high returns, and may have the added appeal of being interesting in their own right (as in the case of art or jewellery).

Be prepared to have your money tied up for many years.

Cryptocurrencies

Cryptocurrencies are a form of alternative investment.

They’re digital currencies that you can use to buy or sell items and pay companies that accept the currency.

The currencies themselves are pieces of transactional data that are stored and shared using a network of computers called a blockchain.

Once each piece of transactional data has been stored on the blockchain it cannot be altered because every computer on the network holds the information.

There are lots of digital currencies, the biggest of which is Bitcoin.

You may also have heard of altcoins, which work in a similar way to Bitcoin but follow a different set of rules and can be produced (mined) using more common hardware. Ethereum is a popular type of altcoin.

Lots of people invested in Bitcoin and other currencies when their value was increasing rapidly, but many have since experienced high volatility and they have become risky investments.

An even newer investment is initial coin offerings (ICOs), which are blueprint digital currencies looking to raise capital – these carry even more risk.

Cryptocurrencies should be viewed more as a gamble than an investment, and financial advisers will typically warn you away from them.

Which investments are right for me?

The investment that’s right for you depends on your circumstances, goals and your appetite for risk and reward.

If you’re thinking of starting a new investment, it pays to speak to an IFA first to help you choose the right strategy to grow and protect your wealth.