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How to Choose Where to Invest your Money

If you are reading this, then the likelihood is that you either have money to invest, or are already investing, or just wish to find out more about the opportunities for your money. There are plenty of options open to you and your money, but deciding which is best for you is not as easy as you might think. Before selecting an investment you should certainly understand two things about yourself, both of which will have a large bearing on what investments you choose, and how you invest.

Are you active or passive?

If you have time to commit to selecting, watching, monitoring, and managing your investment portfolio, and you want to do so, then you might consider yourself an active investor. You’ll keep abreast of the financial news, analysing the companies in which you are invested or that you see as targets for your investment money, and make buy and sell decisions accordingly.

You aim is to beat the return that you could achieve by having a portfolio that was designed to give a return equal to a benchmark market. You may decide, for example, that the banking sector will be weak while the oil sector will be strong over the next few months, and put a bigger weight of your investment into oil companies rather than the big banks.

On the other hand, you may have cash that you wish to invest, but no time to spend researching and selecting investments. You might like the idea of achieving the long term gains that the stock market has produced historically, but don’t want the hassle of monitoring a portfolio of shares. You might decide to invest passively by buying units in a find that tracks the stock market, or perhaps shares of an Index ETF. In such a way you will gain exposure to the potential returns, without the time needed to manage a portfolio actively: you will be investing passively.

What risk are you prepared to accept?

Risk acceptance is both emotional and financial. Some people don’t have the resources to be able to accept taking a large risk with their money. If you had saved £1,000, could you afford to lose it by investing it in the shares of a new company that promised a lot but had no track record? Your answer to this question will tell you about your capacity for risk: your ability to withstand a financial loss.

Changing the wording of the question slightly, if you invested £1,000 in a company, and that investment went down in value, how would you feel about it? The answer to this question will tell you about your attitude to risk, how you feel about accepting risk to make better gains.

Combining the answers to these questions about how you want to invest and the level of risk you are prepared to accept will help you select the appropriate investments.

What can you invest in?

There are many assets in which to invest, and which you pick – or what proportions of each you select – will depend primarily upon your attitude to risk and the type of investor you are.

Cash Savings

Considered the safest investment, placing money in a savings account with a good interest rate will mean that your original capital is always there for you when needed. Some accounts offer higher interest rates for committing to a fixed term. You will pay tax on the interest (unless you are a non-tax payer), though you can protect yourself from this liability by investing in Cash ISAs.

Government and Corporate Bonds

Governments and companies need to borrow money: governments to meet the requirements of public spending, and companies to gain access to funds that will help them expand their businesses. Whilst there is a risk here – both companies and governments may default on their commitments – the risk is considered only a little greater than holding cash. Of course, corporate bonds will carry the higher risk but offer a better rate of interest accordingly. As with all investments, the higher the potential return, the higher the risk to your investment.

Property

You could decide to invest in property directly, buying office your residential space, or invest in property funds that do the same. The advantage here is that you could receive rental income as well as see the capital value of the property rise. Of course, if the property remains empty for a time, then maintenance and other charges still have to be found without the income generated from the rental. As has been seen through the mid-2000’s, there is no guarantee that property prices will rise, either.

Stocks and Shares

Investing in shares of publicly listed companies gives you a holding in the fortunes of those companies, the business sectors in which they operate, and the wider economy. The level of research required will be greater, and the risk is proportionate to the potential reward. Within this category, there will be stocks seen as lower risk, big multi-national corporations for example, and new start-up companies that are just setting out but could grow rapidly and produce killer returns.

Gold and Other Commodities

Investing in gold and other commodities has been popular for thousands of years, and few investments have kept pace with inflation like gold in particular. People who were paid a salary in gold 2000 years ago would still have considerable purchase power today with that same amount of gold, as opposed to most currencies over time. Some would argue that gold is a "protector of value" rather than an investment, and thus more of an alternative to cash. Your specific investing goals will determine whether gold is right or not for you.

Methods of investing

You can invest in all of the asset classes either directly or through pooled investments, such as investment funds or unit trusts. You can invest actively, and manage your portfolio on a daily basis, or passively. If investing through funds, you can also select funds that manage your investment either actively or passively, perhaps, for example, an index tracking fund or ETF.

However you decide to invest, you should have definite goals for your investment. Understand that the potential returns will also carry possibility of loss, and how you would feel about a loss is all part of your make up as an investor. Knowing what type os an investor you are will help you to select the right investments and investment approaches to achieve your financial ambitions.