The basic b*tch guide to investing: things you need to know

We’re reclaiming Kate Moss’s fave insult & saying: yea, we’re basic when it comes to investing. But we can all get more informed. This guide is a good start

Iona Bain

Attention, attention. Were you born between 1980 and 2000?

Oooh. At the very least, you’re probably feeling a bit angsty about the future. At the worst, it may be a case of PANIC STATIONS!

From rising housing costs to flat wages, so-called ‘millennials’ are routinely cited as the first generation to be worse off than their parents.

The last of Generation Y is about to enter the workforce, while those born at the start of the generation are now well into their career. They could all be forgiven for thinking that the outlook for wages and jobs growth does’t look dope.

But actually, the picture is a more mixed one than gloomy media reports would have you believe. Putting to one side the hot potatoes that are Brexit and political “uncertainty”, many young people are showing a remarkable degree of financial resilience in the face of adversity. Numerous reports show that a surprising number of young workers are setting aside savings, with a low opt-out for auto-enrolment into workplace pensions, and are increasingly aware of the need to look after their money.

And perhaps even more significantly, asset-rich baby-boomers  – yea, the ones we love to rag on – are actually proving to be a saviour for those lucky enough to have parents who can help them. The Bank, Hotel and Psychotherapy Couch of Mum and Dad have proved invaluable over the years for many millennials trying to make their way in this tough world.

And globally, the shift of wealth from older to younger generations is set to be HUGE. Babyboomers are predicted to pass on an astonishing $41 trillion to younger folks in their lives over the next 40 years, according to the World Economic Forum.

So what will Generation Y do with all that money in the long-term? Put it on deposit? Even though the base rate jumped upwards (all of 0.25 per cent, wowee), don’t count on the banks to give us better rates in return for our savings just yet. The banking sector is still (relatively) awash with money thanks to the Funding for Lending scheme, so most cash deposits at the bank are currently eroding in real value because inflation is still running ahead of interest rates. You might think you’re doing well by putting money into an account paying 1 pr 2 per cent, and you are if this is your first foray into investing. But if the cost of living is rising by 3%, then your savings are losing money. Sorry to be the bearer of bad news.

Keep putting money away fro a rainy day, emergency or Machu Pichu. But once that’s covered there’s an alternative to cash savings – investing.

I have been talking about investing on and off for a while, as I have just started doing it myself, but I feel it is unbelievably helpful to keep having refreshers on the common sense rules around this vital part of long-term money management. So if or someone who know is flirting with the idea, here are the basics condensed into one video and one article. By all means continue to read more on the subject but not before giving this the quick once-over with your eyeballs.

Investing is not risk-free

I would do you a disservice if I pretended that investing if a sure-fire way to make money. Prices of sharesbonds and other assets fluctuate all the time and so there is always a chance that you may not get back what you put in. You raise those odds if you do certain dumb-ass things, of course – coming into markets as they are riding high and selling out when they go low, being too short-termist, being too attached to particular assets, pinning all your hopes on one or two “wonder” stories. And conversely, there’s a lot you can do to manage the risks – understanding what you’re investing for, how long you’ve got and choosing a correctly balanced portfolio for all that jazz.

Investing is a long game

George Michael originally based his song Faith on his investment strategy, and the fact that it makes sense to be patient and wait for markets to do their thing over the long term rather than panic and sell out too quickly.  Okay, that’s not true. But IT COULD HAVE BEEN. History has shown that equities (i.e. shares in companies) generally outdo cash over the long haul, so it makes sense to commit to your investment choices for at least five years. I know, I know. You may not even be alive in five years time (maybe it’s time to give up part-time parkour, huh?) and you’re probably itching to do things like, I dunno, BUY YOUR OWN HOUSE OR TRAVEL. But planning ahead so you can invest for these goals over 5 – 10 years may be a smart move. So if you’re in your early twenties, start now. The effect that compounding will have at this particular point in your life is INSANE. If you invested £100 a month for 20 years with an average yearly return of 4.5%, the total pot would be worth nearly £40,000 – almost double the amount that would be generated without compounding.

Investing revolves around goals

You need to start getting your sums together – what kind of return are you aiming for, and how long have you got? The more time you have to invest, the more ambitious you can be in your investment goals. So you can afford to take more risk over longer time-frames (such as twenty years) as your investments will be able to ride out the short-term judders of the stock markets. But this is not an invitation to invest, sit back and forget all about it. You need to be proactive in making sure the portfolio fits where you’re at in your journey (say that word in an American accent for added corniness). For instance, if you’re getting near to the point of wanting to cash in your investment, you should go more cautious to reduce the risk of any sudden stock market movements wiping out your gains.

Get to know asset types and their risk profile

Let’s talk the lingo for a moment. The types of investments you’ll deal with are called assets classes – your equities, bonds, commodities and other assets that will probably be less common in a starter portfolio. They all sit on a risk spectrum, with cash and government bonds on the safer side and equities going towards the riskier end. A textbook portfolio should hold a mix of assets that suits the investor’s risk appetite and goals. Maybe a graph might help. LOOK, HERE’S ONE I MADE EARLIER!

RISK SPECTRUM

 

Sexy.

There are also risk scales within asset classes themselves. So equities listed on the FTSE 100, Britain’s main stock market, are more likely to pay dividends, give you an income and be all round Steady Eddies compared to, say, small and young companies which could become the next Facebook, or they could just die on their arse. So the graph offers a bit more detail on the risk profiles of different investments within certain asset classes.

Stocks and bonds risk graph

Diversify to spread your risks

Yes, we all know about that bloke who did some wall art for Facebook and got shares when it first started and is now, like, a zillionaire. Repeat after me – clickbait is not to be used as the basis of your investment strategy.

Don’t pin all your hopes on one investment, as amazing as it may seem. There are just too many variables outside your control. You can spread your risk by picking a number of shares, bonds and other asset classes across a range of sectors, regions and markets.

I’m going to use an example that may or may not apply to you – it ain’t financial advice, so please don’t take it as such. A slightly more adventurous portfolio for the long run may comprise 70% equities and 30% bonds and cash. Within the 70% equity band, the equities could be spread across UK, European, American and so-called emerging markets (countries like China, India, Brazil and Russia). If you’re in any doubt about the right investment decisions to make for your long-term goals, you can talk to a financial adviser, use an online investment manager and/or read up more around this issue – I certainly urge you to do the last. And my feeling with these things is that whatever option you go for, there is no substitute for being informed and taking ownership of your investments by checking your portfolio has maintained the right asset mix to keep your goals on track.

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