I know that talking about money makes you
want to do this, but don’t worry, I’m going tell you what you need to know about
investments in only 3 minutes. If I told you there was a way you could grow
your cash over the longer term that could beat any savings rate you’d probably be
very interested, well, interested ish. Okay, let’s go with marvelly curious, but here’s
the thing, what you’d be investing in is the stock market, which, I know is traditionally
the preserve of run ruddy faced poshos shouting in to 1980’s mobile phones, but not anymore.
These days, even regular folks like you and me can invest, and here’s how you do it.
Think of a company like a cake. If you buy a stock or share in it, it entitles you to
a tiny slice of it’s assets and earnings. If market analysts think the company will
be successful the share price will rise meaning your investment is now worth more than you
paid for it and you’re one step closer to buying a yacht. Two steps closer if that company
is also making profits, because, if it is, it may also make regular payments called dividends
to shareholders, i.e. you, the big dog on campus. At least that’s the theory. In reality,
not all companies are successful and the value of shares can go down as well as up and you
may not get back the amount you invested. So, the key is to buy shares that will increase
in value and sell them for more than you paid. Now, I know what you’re thinking, it all
sounds simple but doesn’t it require a ton of very boring knowledge and staring at graphs
all day. Yes it does, which is why some investors employ stockbrokers, likely called Toby or
Olly, to do all that boring staring at graph stuff for them. But, they don’t come cheap
and the average investor doesn’t have nearly enough money to make their fees worthwhile.
Instead they invest in a stock market fund, which is an easier way of entering the market
because it pools people’s cash and a fund manager acts on everyone’s behalf bulk buying
and selling shares. Although there’ll still be fees to pay, they should be a lot lower,
but it can still be risky so the question is; how risky are you feeling?
An actively managed fund invests in shares a fund that the fund manager thinks will rise
most in value. If they’re right, your returns will be better than the market average and
its champagne and jetpacks all round. But, if they got it wrong and they picked shares
that ended up lower than the average, well, let’s just say baby’s not getting new
shoes. So you could try the lower risk option, an
index tracking fund, where, instead of selecting individual shares, the fund manager tracks
a stock market index, such as the FTSE all share index, by investing your money in every
share that makes up that index. Now, it might not make as much money as an actively managed
fund because it can never beat the market average, but it can’t go lower either, meaning
it’s the most reliable and least risky of the two options. So, trackers could be the
best place to start for the would be investor. And that’s the stock market, not half as
scary as you thought, right? The important thing is to be comfortable with putting
your money away for the longer term, at least 5 years, and be happy to watch it go
up as well as down in the meantime, a bit like a yo-yo or a pair of financial under
crackers. Bye bye.