‘I don’t need any more money, I’m fine as I am,’ said nobody ever.
OK, well, maybe a couple of people have, but they're rare beasts indeed; the thoroughbreds amidst the rest of us donkeys. Most of us find ourselves in the middle ground, the Government's much-vaunted JAMs, or Just About Managing folk; we’re not clawing for every single penny, but neither are we comfortable enough that the loss of a paycheque or two wouldn’t go unnoticed. All hail the mighty Squeezed Middle.
For the vast majority of people, money is something there is never quite enough of. From Millennials to OAPs, there are few of us who wouldn’t like to double our income, and yet only a very small percentage of people actually put their money out to work.
Part of the problem is that we’ve all grown up watching films about hectic Stock Exchange shenanigans, from Wall Street to The Wolf of Wall Street, we’ve seen chancers making it big while the little guy suffered – and then the global financial crisis came along and showed us that the worst of our fears were true. It made us all think that investing our money was dangerous; too much of a risk for those of us with not a huge amount to lose. So, we sit on our money and hope for the best. The thing is, that there are plenty of low-risk options for the cautious investor; it’s just a matter of knowing where to find them.
Understanding Investment Risks
Every investment comes with some kind of risk, but some risks are greater than others. Researching potential investments before jumping in is the best way to arm yourself against losses, but first, you need to know where you might encounter risk.
There are five key areas:
- Market – Your equity, interest rate and currency value are all liable to fluctuations in reaction to external market pressures, this can impact on your final ROI.
- Single Focus – If all of your financial eggs are in one investment basket, any loss will be more sharply felt. If you spread your investments it reduces the impact of any loss.
- Inflation. We’ve all heard enough about inflation in the news to know how it impacts upon everyday prices, but it can also impact upon your investments. If the percentage of your ROI is lower than the rate of inflation during the period of investment, you’ll find yourself out of pocket in real terms.
- Debtor/Credit Risk. If the company you have bonds in, or the person you’ve invested in go broke they’re not going to be able to repay you, so not only will you have lost your interest, but also your original investment.
- Selling Out. If you need to cash in your investment early, there is a risk that you’ll have to accept a lower price than you originally paid, and you’ll certainly lose out on interest.
Knowing these five facts won’t protect you against potential losses, but it will allow you to make more informed decisions, and move towards investments that come with a decreased risk factor.
Five Low-Risk Investment Options
Wherever you put your money, starting out can feel a bit scary, but these are five of the safest bets that still have the potential to deliver a high yield.
Real Estate Investment Trusts (REIT). REITs were introduced in 2007, and they’re essentially companies dedicated to making a profit from property investment. The way it works is that your money is put into the purchasing of properties, which will then be managed by the REIT and rented out. Your return is basically a cut of that rental income. Special REIT tax arrangements mean that dividends are only assessed for tax once, and because the UK is famously – and chronically – short of housing, it’s highly likely that there will always be a tenant waiting to occupy your property, so you will always have a steady income stream.
Over the course of a 15-year investment, you could typically expect to gain a 10.5% actualised return.
P2P (Peer to Peer) Lending. P2P lending evolved due to the constraints on banks following the financial crisis. In the first few years after the crash, it was near-impossible to obtain a loan for small businesses, new startups, and independent individuals who needed a cash injection for a particular purpose, but lacked the assets to cover a default of payment. P2P platforms stepped into the gap that was created, allowing for the crowdfunding of loans. This means that people with a bit of spare cash could help out those who needed it, while generating a comfortable return for themselves.
P2P began as a purported bubble, but is now thought to be worth £7 billion in the UK alone, with no signs of slowing. If you can find a reputable platform, it has the potential of generating as much as a 13% ROI, with very low risk.
FastInvest currently offers a typical 9-13% ROI to P2P investors. And because the company offers both buyback and default guarantees – if you need you need you cash back quickly, FastInvest will purchase the remainder of your investment loan from you, and if a borrower defaults on their payments FastInvest will cover the deficit – FastInvest P2P investments are one of the lowest-risk propositions on the market for people looking to make their savings work for them.
Fixed Annuities. Fixed annuities are growing in popularity because it makes for a more comfortable retirement, and leaves you with a regular payment during your dotage, as well as a lump sum which you can later reinvest. How does it work? The short version is that you pay all or part of your pension into a retirement income fund for a fixed number of years, and return you will gain a fixed return! There are, however, a huge number of variables when it comes to annuities, so before you take the plunge, it’s well worth consulting an independent financial advisor.
Dividend Paying Stocks. The word ‘stocks' will have a huge number of you throwing your hands in the air and running for the hills, but it's not as frightening a proposition as you might think. Dividends are basically the way that companies reward shareholders for holding stocks. Dividends are usually cash and usually paid quarterly, although some firms do prefer to issue an annual lump sum, or additional stocks instead of cash, so read the small print. The return you get with dividend-paying stocks varies from company to company, so there are no fixed rules; with smaller names, you may just get 2.5%; with bigger, you could find yourself looking at as much as 8%, so again, it pays to do your research and shop around. If you work with a DRIP – not the annoying colleague at the next desk, but a Dividend Reinvestment Plan – you can compound your interest, and that's where the serious returns come into play.
Credit Card Rewards. Now, this is a slightly funny one, and not something that many people would consider when thinking about getting a good return on their money, but credit card rewards (or other spending reward schemes, such as Quidco) can provide a significant boost to your income. The drawback here is that it involves spending cash, but if you’re not spending anything in excess of your usual purchases, doing all of your shopping on a credit card – being sure to pay the full statement value at the end of each month – can see the pennies and pounds rolling in. American Express, for example, deliver a 5% return on all purchases for the first 3 months – dropping down to 0.5% thereafter. It may not be an enormous gain, but it’s something for nothing, which should never be ignored.
There is, of course, one further thing that you can do to improve your financial well-being, but it's not really an investment, so it's not going on the list. What are we talking about? It's the big, boring, sensible one: Clearing Your Debts. At the beginning of this year, it was estimated that Brits owed more than £1.5 trillion in personal debt. If you’re one of those people who rack up the credit card bills, but only pay off the minimum amount each month, or continuously extend your loans, you are, to all intents and purposes, throwing your cash away. Debt can be really difficult to deal with, but if you consolidate it – transfer everything onto a single low-interest credit card, or take out a low-interest loan, it's not only easier to keep track of what you owe, but it will reduce the interest that you're paying. When debts are spread far and wide it's easy to let them get out of hand without even realising. If you first control, and then clear, your debt, you'll soon notice the difference to your bank balance – and then you can start building on that with smart investments.
If you’re new to investments it can all be a bit overwhelming. There are so many decisions to make, so many options available, and so many potential risks. The problem is, if you don’t take any risks, your money will never work for you. As Robert G. Allen said; "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."
And we rest ours.