If you’re not familiar with the world of investments, the prospect can be daunting. This is a simple no-jargon guide to your basic long-term investment options which will serve you well in the long-term.
If this is your first time investing, then you may not have the funds available which make paying for complex financial advice viable. So, you’ll want to do some research yourself.
Let’s start with the categories of investment:
• Cash: Not just the cash under the mattress, but things such as savings accounts or cash ISAs.
• Bonds: A ‘loan’ to the government or a company.
• Property: Buildings or land, usually either your own home or property to let out.
• Equity: Stocks or shares in companies.
• Commodities: Actual tangible goods e.g. metals or oil.
When you’re looking at the long-term, the type of investment is important. This is because different types of investment tend to fare better over the long-term, whereas others are a safer bet in the short-term.
The basic premise is that the riskier the asset, the more it is suited to a longer-term investment. So, a savings account with a bank isn’t risky, it’s secure, and good for a short-term and easy to access pot. Stocks and shares are riskier in the short-term and therefore tend to work well in the long-term. Precisely because they are riskier, they tend to perform better when looked at with a long-term view.
This is an important concept to understand when considering investments. Therefore, it is vital to think about why you are investing in the first place.
If you are investing because you are saving towards a short-term goal (e.g. buying a car next year), a cash-based investment will be most suitable. If, however, you are saving towards giving your child a deposit for their first home and they are only 5, then a long-term investment can weather the short-term issues of risk and ultimately give you higher returns overall.
We know this because if we look at average returns over decades we see that investment options such as stocks and shares don’t always perform well when considered in just a 1-2 year window. However, consider them in a 5-10-year window and they will bring you around 5-6 times as much as cash would. However, this is not guaranteed.
So how do you choose how to invest?
This is why you should first set your reason for investing. This will help you identify whether you would do best seeking a long-term option.
Following this decision, you’ll want to consider how engaged with the investment you want to be. Long-term investments include straight forward options, such as our Stocks and Shares ISA https://www.shepherdsfriendly.co.uk/plans/savings/isa, where someone else does the investing for you. This someone is called a ‘fund manager’. Buying a property could also fit under this category. Alternatively, you may choose to pick and mix the shares to invest in yourself.
It’s also important, at this stage, to avoid concepts which are untested, such as cryptocurrency. Stick with long=term investment options which have historically yielded higher returns.
If you choose to invest in stocks or shares, including through a Stocks and Shares ISA, it’s important to remember that it is very normal for the fund amounts to go up and down over time. What you are looking for is that the general trend, over a long period of time, is upward.
How to decide which long-term investment to use?
It’s worth seeking the advice of an independent financial advisor (IFA) if you are unsure about your investment decisions. Do take time to look at individual options and compare them. For example, if you choose a Stocks and Shares ISA then it is worth looking at its performance over time, and whether they pay a bonus.