Working hard and getting paid is great, but investing that money wisely can be any easy way to make even more. Just putting your money in a bank account is never going to make you a fortune, frankly at current interest rates it’s not going to make you much at all ! So how does it actually work ?
Mutual funds: An investment program funded by shareholders that trades in diversified holdings and is professionally managed. These are a great way to get started, there’s a huge choice of funds on the market so you’ll need to do your research to find the best ones for you. The big advantage of funds is that you don’t have to research all the individual companies they invest in. The fund manager does it for you, at a price. Remember to check what percentage the fund manager is taking out of your initial investment, as well as the annual cost.
Remember that investing is about your goals and aspirations. If you have twenty years to invest and you want to make a sizable pot then you’re going to take a bit more risk than the next investor. So you might pick emerging market funds, tech funds, or funds investing in early stage companies; but you need to accept that you might rack up a few losses along the way.
Investing directly in stocks might be your next step if you have financial smarts
and are willing to do a bit more work. But you’ll need to decide what kind of investor you want to be; ‘buy and hold’, identifying good value companies for the long term, or a more active trader seeking to make quick returns out of moves in the market.
The initial buy decision is crucial for the ‘buy and hold’ investor, involving a lot of research up front; after that, monthly or even quarterly portfolio reviews are enough to keep things on an even keel. Traders need to spend more time on their investments and particularly to keep in touch with market sentiment through devotedly following financial news, so if you switch off before the presenters get to that part of the bulletin, trading isn’t for you.
Exchange traded funds or ETFs are a way you can invest in markets or broad themes and sectors cheaply and effectively. Instead of being actively (and expensively) managed, like funds, ETFs are built to reflect the relevant market index, whether that’s the Dow Jones, global emerging markets, or telecoms stocks. You can even buy ETFs for commodities like gold. If you think Latin America has great growth prospects, or want to invest in the energy sector, ETFs are a great way to do it without having to research individual stocks, and they’re cheaper than funds.
What kind of money can you make?
In the bank, you’ll be lucky to get 0.1%. With mutual funds, you’ll probably get between 5% and 7% a year for an average portfolio, and you may do much the same with the buy and hold equity strategy. If you’re a more active trader, you could make significantly more, particularly once you’re competent enough to trade on margin (borrowing to buy shares).
Whatever kind of investment is right for you, you’re going to need to get some education. Check out Warren Buffett’s reports online for free, or read Peter Lynch’s books to learn how he made money on Wall Street. (They’re approachable reading, not CFA textbooks, thank goodness.) You never know, you may learn so much that you’ve started on a third career, writing e-books or blog posts about personal investment!
And remember two great tips. First, if you invest regularly, and reinvest your profits and dividends, you’ll gain the benefit of compounding – multiplying your initial profits several times over. And secondly, if you keep your costs low – by picking a broker with keen prices, like CMC Markets, or a low cost fund supermarket – you’ll get to keep much more of the money you make.