4.1 How ready made portfolios work
4.2 The pros and cons of ready made portfolios
4.3 Where to invest money into ready made portfolios - Specialist platforms compared
4.4 Where to invest money into ready made portfolios - Broker led platforms compared
4.5 Advertised returns of ready made portfolios
4.6 How risk affects returns
4.7 FrugalStudent's view
Chapter 1: Introduction
So you want to invest your money – but you don’t know where to start?
Maybe you’ve heard about things like peer-to-peer lending and stock market investing but don’t know enough about all the different providers, accounts and risks to make that initial investment?
Awesome, you came to the right place!
I'm going to show you exactly where to invest money in 2017.
I've noticed that it's hard to find a comprehensive list of investment options so I did the leg work for you!
This guide will outline both high risk and low risk investment options in detail.
Before I get stuck into things, I bet you're wondering who I am and what my background is
In 2014 I finally broke free from my cycle of overdrafts and needless spending and decided that I wanted to grow my wealth. But, as a student I didn’t have big chunks of money to invest in one go.
I had heard loads of things about peer-to-peer lending, buying funds and even "trading" the stock market - whatever that meant. But, I couldn't find a single place that compared and explained all available investment options for Brits.
I have invested my own money into most of the investment options covered in this guide so I know how they work.
If you’re ready to take your first step towards investing and growing your wealth, then keep reading.
1.1 Laying out your options
Investment options can be separated into two categories.
Firstly, we have 'no risk' options that don't need you to risk your hard earned cash in order to make a return. The most common example of no risk options are bank accounts and NS&I Premium bonds.
Secondly, we have 'risk' options where you have to put your capital at risk in order to make a return. The most common example of a risk investment is the stock market. If you buy shares in a company that ends up collapsing, you get nothing back, it's as simple as that.
While comparing no risk and risk options a general rule of thumb is that risk options almost always offer higher rates of return than no risk options. After all, there needs to be an incentive for putting your money on the line.
To make things easy l I've created this visual 'risk meter' to rate each investment. Please note that this meter is based on my opinion as an investor and opinions may vary.
Away from categorising investments as risk and no risk we can categorise investments as 'Income generating' and 'Non-income generating'
Income generating investments are investments that pay you an income, usually monthly but sometimes quarterly or yearly. The classic example of an income generating investment is buying a stock that pays a dividend.
Non-income generating investments are investments that don't pay you an income. Instead they simply seek to grow your invested money. The classic example here is a bank account where you get paid interest once annually.
Chapter 2: The no risk option - NS&I Premium Bonds
Although no risk options protect you from large losses, investors need to be aware that you can lose money in real terms due to the eroding effect of inflation.
An example of this would be the consequences of holding money in premium bonds.
If someone held £1,000 in premium bonds for one year with inflation at 2% target and they didn't win a prize then their £1,000 has effectively been eroded by £20.
They would still have £1,000 in their account, but the purchasing power of that money would be 2% less due to the increase in prices.
2.1 Premium bonds - how they work
2.2 Premium bonds - advertised returns
Premium bonds are owned and operated by the government. Instead of being paid interest, investors get entered into prize draws to win an amount from £25 up to £1 million. These prizes are paid to investors tax free.
Because premium bonds have gotten more popular due to the financial crisis, the chances of winning any of these prizes are slim.
Martin Lewis at Money Saving Expert has done a lot of legwork here and produced the following table depicting the chances of winning each prize amount.
As you can see, the chance of winning the £1 million is astronomical and the chance of winning a mere £25 still very low - nothing is guaranteed.
Crunching the numbers - £1,000 invested into premium bonds over a year would give you a 67% chance of winning £0 and just a 33% chance of winning £25.
Using a medium average to calculate, the chance of winning £1million with £1,000 invested? 1 in 207,702,777
If you're looking to invest into premium bonds and want to get a rough estimate of what the laws of probability estimate you would win then use this calculator.
From May 2017 a new prize allocation will be put in place. The changes are as follows.
With the number of larger prizes being reduced, premium bonds are likely to continue to be viewed as a poor investing option for most.
2.3 Pros and cons of investing in premium bonds
• The scheme is owned and run by the government, making it about as safe as your money will get.
• A chance of winning £1million.
• May be attractive to higher rate taxpayers who have filled their ISAs and earn more than £500 a year in interest payments (as there is no tax levied against prizes.)
• You won't be charged any exit fees for withdrawing your money and you can do this at any time.
• It's very simple to invest into premium bonds.
• You're more likely to win nothing than a prize even with £1,700 invested - it's only when you have more than that amount invested that you have better odds of winning a prize than not. (Mean average used to calculate figure).
• Very small chance of winning the big prize of £1 million - Even with £50,000 invested the odds are just 1 in 52,000 a year.
• No guaranteed interest or income.
• Investors are likely to have their money eroded by inflation.
• Changes being introduced in May 2017 reduce the number of large prizes available.
2.4 Frugal Student's view
Personally, I recommend against buying premium bonds unless you're a higher rate taxpayer already earning over £500 in interest.
Everyone else looking for a no risk investment would be better off sticking their money into an ISA or bank account for protection against inflation.
Those comfortable should take a look at peer to peer investing.
Chapter 3: Peer to peer lending
Peer to peer lending is a relatively new concept where investors can lend their money to companies that need loans for whatever reason.
The peer to peer industry has really taken off with the government even match funding loans through some platforms in order to try and support the expansion of businesses.
There are three main players that we'll compare in section 3.3.
3.1 Peer to peer lending - How it works
3.2 Peer to Peer pros and cons
• You’re likely to get a much better return on your money than in a savings account
• It’s all regulated! The FCA has regulated peer to peer lending since 2014
• Some schemes (see below) offer safeguard funds so bad debts won’t wipe out your returns
• Tax free investment – Before long you’ll be able to invest your money through an ISA meaning capital gains tax won’t be due on any profit.
• You’ll have to lock up your cash for one to five years if you want the best rate. If you need it in an emergency you’re likely to get charged for early withdrawal and have to wait to ‘sell’ your investments to get cash back. (This is called illiquidity)
• You might have to wait for your money to be lent and you won’t earn anything until it is.
• Some platforms allow you to hand pick investments. This can be risky especially as most lenders are small businesses that could potentially go bust.
• No Financial Services Compensation Scheme (FSCS) protection. If your platform goes bust then the government won’t compensate you. You're likely to lose every penny invested.
3.3 Peer to peer investing - Where to invest money
There are three main peer to peer platforms - Funding Circle, RateSetter and Zopa.
RateSetter and Zopa act just like savings accounts and have what they call "safeguard" funds to pay investors if they're in possession of a 'bad debt' - in other words a loan that isn't being paid back.
As a consequence, the advertised returns are lower than that of FundingCircle who have no safeguard fund but offer higher returns if no debts go bad.
Another difference between the platforms is that Funding Circle allows the hand picking of investments meaning you can look at businesses looking for loans on a one-by-one basis and decide whether you want to loan them money or not. This means you have considerable control over your investment.
RateSetter and Zopa on the other hand do not allow investors to select investments one-by-one basis and instead offer a variety of investment options tailored to investors of varying risk tolerance.
You can take a look at the main differences between the platforms below
Breakdown of options
Funding Circle: Offers the biggest returns but also carries the biggest risk of bad debts.
RateSetter: The safest option having never lost investors a penny!
Zopa Classic: A happy medium – With a £20mn safeguard fund and offering a 3.9% return it’s probably the best balance for investors looking for a return over a number of years – Just watch out for the 1% fee for selling loans!
3.4 Frugal Student's View
In my opinion peer to peer lending is ideal for investors looking to get bank account beating rates without taking on much risk.
At 2.3% interest, RateSetter's one year account smashes the prospects of premium bonds, and although you have to risk your money, not one investor has ever lost money due to RateSetter's large 'safeguard' fund.
With the likelihood that interest rates will continue at the current historical lows for years to come, the 5 year option may be appealing to investors who don't mind locking up their money for long periods of time
However, more attractive returns can be found on the stock market if you don't mind cranking up the risk meter.
Chapter 4: Ready made stock market portfolios
As with any stock market investment ready made portfolios need to be held for at least five years preferably ten in order to reduce risk. It is possible to suffer devastating losses in the short term.
Ready made portfolios are investment portfolios that have set investments when you purchase them. These portfolios are usually organised by risk. Low risk portfolios tend to hold a lot of your money in cash and government bonds whereas high risk portfolios hold almost all of your money in stock.
High risk portfolios tend to significantly outperform the low risk portfolios in the long term but prove much more volatile with large spikes followed by large drops and vice-versa.
Some platforms have "robo advisors" that will ask you questions in order to determine what premade portfolio is right for you. Some will even tailor make a portfolio based on your responses.
There are two types of platforms available for this kind of portfolio. I define these different platform options as "Specialist" and "Broker led".
The former come from operators that who specialise in ready made portfolios. The main operators in this space are Nutmeg and Moneybox. Although it's important to note that Moneybox is a bit different to the other platforms, but I'll go over that later.
The other platform classification is ‘broker led’ . They offer a range of different investment options including shares, funds and bonds alongside ready made portfolios.
The specialist platforms tend to offer lower customization and control but cheaper fees whilst broker led platforms tend to offer more flexibility - for a price. The specialist platforms also offer more focused content which can be a useful guide to newbie investors.
The specialist platform Moneybox also offers "round up" investments where they round up purchases to the nearest pound and invest the difference into your chosen ready made package.Read on to section 4.3 for more detaiil on the differences between these platforms.
4.1 How ready made portfolios work
4.2 The pros and cons of investing in ready made portfolios
• FCFS protected – if the platform you're using goes bust, the government will give you your money back.
• Let the experts manage your money for you – trained professionals that deal with millions compose your portfolios for you.
• Reduce your risk – money in these portfolios are spread over hundreds of companies over hundreds of indexes and are well diversified between cash, bonds, funds, indexes and shares.
• Simple interfaces clearly defined options make ready made portfolios easy - just select your risk tolerance and that platform takes care of the rest.
• The specialist platforms offer generally low fees and are a very cheap way to get invested into the stock market as buying and selling individual shares can be very expensive.
• No dividend payments mean that 'ready made' portfolios aren't income options, you'll have to sell a proportion of your portfolio to take gains.
• 'Broker led' platforms have fees as high as 1.5% which will greatly diminish returns in the long run.
• You’re still investing in the stock market and as such the risk is significant - could lose money, especially over the short-term.
• Low customisation – you generally have three options to choose from and as such you can’t put your stamp on the portfolio.
• Illiquidity: To reduce risk you need to tie your money up for a long period of time and withdrawing money in the short term can lead to high exit fees and devastating losses.
4.3 'Specialist' platforms compared
There is a major difference between Moneybox and Nutmeg even though they are both considered specialist platforms.
Moneybox only invests into one stocks and shares fund, the global shares fund. The 'risk settings' it offers simply changes the amount of money it invests into the FTSE on your behalf. The exact proportions can be seen below.
Nutmeg on the other hand will invest into different funds depending on your risk setting.
4.4 'Broker led' platforms compared
As with Nutmeg, these platforms will invest into different funds depending on your risk setting.
For example, a high risk portfolio is likely to hold emerging market funds whilst low risk portfolios are likely to hold some cash along with blue chip shares and secure bonds. This is why some refer to Nutmeg and the broker led platforms as 'roboadvisors'. In my view, the fees these platforms charge clearly outweigh any benefits of their accounts.
4.5 Advertised returns of ready made portfolios
For the ease of comparison, all returns below will be that of each platform's medium risk option
Moneybox doesn't advertise a projected return, instead displaying the past performance of it's fund.
As we can see from the illustration above, an investment period of 9 years would turn £1,000 into £8,662 with a £50 monthly investment.
But, there's a lot of spin in this with the monthly contribution somewhat making returns appear much larger than in reality. Here's what investing a lump sum of £1,000 at the start of 2007 would return without monthly contributions.
A set investment of £1,000 at the start of 2007 would have been worth £1,508 at the end of 2015, returning just over 50% over 9 years. This is equal to a 5.5% annual return or around 5% taking fees into account.
Nutmeg wouldn't let me project the performance of a £1,000 investment due to their minimum investment requirements. But by entering a £10,000 initial investment followed by no monthly contribution we can see that the expected portfolio value would be £14,699 in 9 years time. A £1,000 investment therefore would be worth around £1,469. A 47% increase over 9 years or 5.2% annually.
What these two comparisons make obvious, although one is retrospective and one perspective, is that these platforms are working with an assumed return of around 6% for their medium risk portfolios. (The stock market yearly average over 100 years)
In reality, it's impossible to predict the future performance of these funds as past performance isn't a suitable guide for future returns.
One thing I am sure about though is that if you leave your money in a ready made portfolio long enough you'll make more money than you would with it sitting in a bank account.
4.6 How risk affects returns
So how much is a ready made portfolio's returns affected by the risk settings?
I decided to take a look at the two most popular platforms, Nutmeg and Moneybox to illustrate the relationship between risk and return.
On their website, Nutmeg displays historical annual returns for their portfolios from 2012 to December 2016. I took that information and tidied it up into an easily readable graph;
(X – Risk setting, 1 = Lowest risk, 10= highest risk) (Y – Annual return %)
This graph clearly shows that the higher the risk the higher the return.
Setting the returns of each risk setting for Moneybox and Nutmeg side by side, we can see that the trend remains the same.
Taking the advertised returns from Moneybox through 2013-2015 and then the same years for Nutmeg we can make direct comparisons between the platforms and risk settings.
As Moneybox only has three risk settings I will match the settings as follows;
Nutmeg risk 1 = MoneyBox - Low
Nutmeg risk 5 = MoneyBox - Medium
Nutmeg risk 10 = MoneyBox - High
Crunching the numbers, here’s what we get;
I know that these comparisons aren’t like for like as it's difficult to making direct comparisons, but I hope it’s some help to visualise returns between platforms and risk.
4.7 Frugal student's view
It's important to note that we're not comparing identical products here.
Nutmeg offers some portfolio rebalancing while Moneybox is effectively a varied tracker fund. HL and Fidelity offer complex products that build portfolios from various funds tailored to your goals.
Unfortunately, in my view, the very high charges of these products make them uneconomical in many cases. The high fees would essentially cancel out any benefit that personalisation and outperformance may offer.
It's clear from the above tables that the 'specialist' platforms are much better value for money than their 'broker led' counterparts. As a result, I would recommend investors ditch the broker-led platforms in order to go with either Moneybox or Nutmeg.
Out of the two, my personal favourite is Moneybox due to its simple app and the option to round up purchases. This can really boost the amount invested in the long run.
Nutmeg also has a considerable £5,000 minimum investment. If you don't want to make monthly contributions and you're a frugal student too, you may not be able to afford the £100 a month needed with the minimum lump sum of £500.
However, it's worth noting that if your portfolio is always going to be small (under £3,000) then Nutmeg is the cheaper option as the £1 a month Moneybox fee can amount to as much as 1% fee with only £100 invested.
And if you do want more control over your investment then its Nutmeg that has the wider range of options for customisation.
Ready made portfolios are a great way to get invested into the stock market without having make investment decisions yourself, as would be required to invest in funds and individual stocks.
If you're thinking of getting into ready made investing then I highly recommend you read my Nutmeg investment review here.
Chapter 5 - Investing in stock market funds
In simple terms funds are a collection of shares in different companies. They tend to hold shares in tens of different companies and usually have a fund manager making all the investment decisions on behalf of the clients who have invested.
Funds with a fund manager are called 'actively managed funds', here's how they work.
5.1 How funds work
The above infographic shows how actively managed funds work. There also exists another type of fund - passively managed.
Passively managed funds have no manager. Instead, they are run by a computer. They simply track a market. You can see the differences between actively managed funds and passively managed funds below.
5.2 Actively managed funds vs passive funds
5.3 Pros and cons of investing in funds
• Fund managers have resources that individual investors could only dream of, with dedicated teams constantly analysing data in order to guide investment decisions.
• FCSC Protected – if the platform goes bust you get your money back. Please note this does not mean that you'll get your money back if the fund itself loses money.
• Instant diversification over a large number of companies cheaply means that your risk is greatly reduced.
• Invest from as little as £25 per month.
• Tracker funds have very low fees, sometimes as low as 0.15%.
• Tracker funds are considered relatively safe investments as they are heavily diversified across their target market.
• Actively managed funds usually underperform compared to the market as their high fees erode any superior gains.
• You can’t select individual shares based on your judgement meaning that you may buy into companies that you judge as having poor prospects.
• It can be difficult to select the right funds and learning how to identify funds to buy takes time.
If you'd like to learn how to select the right funds, sign up to my funds newsletter here
5.4 Where to invest money in funds
There are tens of platforms out there and they vary greatly in cost and ease of use.
I’ve broken down the main Fund platforms below so you can make an informed decision on who to go with.
5.5 Advertised returns of funds
As there is such a variety of funds available on the stock market, it's close to impossible to estimate future returns.
For mutual funds it all comes down to selection. Selecting a good set of mutual funds can see you significantly outperforming the market. For example, Neil Woodford turned £1,000 into £25,000 between 1988 and 2014. But, Mr Woodford's Patient capital income trust has performed miserably since its launch around a year ago. As investment decisions are down to fund managers, it's impossible to put a figure on projected returns.
When it comes to passively managed funds, it's much easier to give an idea of returns. The returns of these funds will match the overall index they track.
5.6 Frugal student's view
Investing in funds is an important part of creating any stock market portfolio and is also a great way to get invested into the stock market cheaply with reduced risk.
If you’re looking to invest solely in funds then an 80/20 mix of passive vs managed funds is a happy medium. I would advise investors to stay away from funds charging anything over 1% as a management fee.
A fund charging 1% invested with a platform charging a 0.25% platform fee would erode 1.25% of your gains every year. Over the long term that could cost you thousands. Compare this to a passively managed fund charging under 0.2%.
When it comes to selecting a platform I'd recommend AJ Bell for investors looking to invest large amounts of money and make large monthly investments - anything over £500 a month - as the maximum fee of £7.50 a quarter would really save a lot of money.
For smaller investors and those looking for ease of use I recommend Hargreaves Lansdown. The platform is clean and is packed with useful information.
Yes, the 0.45% platform fee is on the expensive side but it's free to buy and sell funds. Also they have a list of their top 150 funds called the 'Wealth 150' which can be a good starting point for investment ideas. They also offer significant discounts on the charges of these funds.
Buying funds is a natural step up from ready made portfolios and most passive funds are suitable and,in my view, a must for any investor looking to gain a decent return in our low interest rate environment.
Selecting managed funds though can be difficult and I'd highly recommend signing up to my newsletter in order to learn how to select funds before investing.
Chapter 6: Buying individual shares on the stock market
Buying individual shares requires significant skill, knowledge and resource. That doesn't mean that investing in individual shares is out of the reach of the general public, but, going into buying individual shares without the skills required to effectively value shares means that you're very likely to lose money. It's essential that you do further research on analysing shares before you invest.
If you want to learn how to analyse shares, you can sign up to my shares newsletter here
In this low interest rate environment, people are having to risk their money in order to gain any meaningful return on investment. That's why so many are turning to investing their money into individual stocks without really knowing what they are doing.
When I first started investing, I lost over £1,000 making bad investment decisions. I invested into tiny and volatile companies in search of the next Apple. This is not how to invest. In section 6.1, I am going to give you a brief background of investment methods followed by explanations of "Value investing" and "Dividend investing". These investment methods are followed by defensive investors such as myself in the hope of slow and steady returns.
As a guide, the most I am up on a stock is 68% and the most I'm down is 50%.
But, before I get on to investing and investment methods - you should be aware of the difference between investing and trading .
Traders will buy stocks, currency or commodities with the intention of selling them at a higher price. These individuals aren't interested in "value". Conversely, they are usually obsessed with a range of complicated charting methods and trends that they believe will identify stocks that will increase in price over a set period of time, be that hours, days or months.
They then purchase the stock and seek to sell it at a higher price. If their purchase drops significantly in price they will sell it and realise the loss.
Investors (such as myself) tend to only buy stocks as opposed to commodities and currencies. We also often have little interest in a stock's immediate trajectory. Instant capital appreciation is not the aim of an investor.
Investors instead seek to purchase physical stakes in companies for reasonable price with the intention of holding that stock for a long period of time, often forever. This is markedly different to trading because traders seek to hold their purchases for a limited time and have absolutely no intention of holding their stake for its underlying value.
6.1 My Investment methods explained
When it comes to buying shares there are countless different methods and tactics utilised by investors.
Some focus on the movement of the stock whilst others focus on underlying value. For example, "momentum investing" is an investment method that advocates purchasing stocks that have performed well over the past year or so in the hope that the strong performance will continue. A great example of momentum investing would be buying shares in the online clothing retailer ASOS Plc which has seen a steady rise in its share price in the past few years. With the underperformance of traditional retailers like Next Plc, momentum investors may seek to jump on the ASOS bandwagon.
On the complete opposite side of the scale, "contrarian investing" seeks to buy stocks that are in direct contrast with the sentiment of the time. For example, I bought Russian securities during the fallout from the annexation of Crimea in 2014. During this period the ruble was plunging and mounting international pressure on Russia was putting heavy pressure on its economy and stock price. Close to three years later, I have made over 100% profit on this investment.
Below, I will guide you through the blend investment methods I use while investing.
If you get stuck with a term then I highly recommend searching for that term on for a Investopedia.com definition and explanation - I've included links for the most difficult terms.
Value investing is all about looking for stocks with solid underlying fundamentals like good earnings, low debt and robust cash flow. As well as solid fundamentals, the stocks also need to be selling at a discount compared to peers and historical averages for them to be deemed a good buy for a value investor.
Value investors looks to buy companies that appear to be undervalued by the market and therefore have the potential to increase in share price when the market corrects its error. Value investors utilise a range of different methods in order to determine whether a company is undervalued If you want to learn how to determine a stock's underlying value then sign up here for a free guide via e-mail.
This doesn't mean that a value investor will sell the share once the market does correct its error in valuation as many, like myself, chose simply to hold their shares, especially if they pay a dividend!
Not all shares are created equal. Some pay a dividend, some don't. For example, Apple pays a dividend whilst Google doesn't. The decision on whether to pay a dividend is entirely up to the management of a company and depends on a range of factors. A dividend, put simply, is money that a company will pay to you on a regular basis as a reward for holding their shares.
There are two types of dividend investors.
1. Dividend growth investors.
2. Dividend yield investors.
Personally, I am a dividend growth investor. What this means is that I look for dividend paying stocks that have increased their dividend, year on year, for over 10 years. The longer the streak of increasing dividend payments - dividend streak - then the more I like the stock.
A key factor of dividend growth investing is dividend reinvestment. Dividend reinvestment is to simply buy more shares of the company paying you a dividend with the shares you receive. Doing this can set off a compounding cycle as seen below.
Dividend growth investing is specifically attractive to younger investors like me who are a long way away from retirement as the longer the compounding cycle is in effect the more powerful it becomes.
But, dividend yield investing may still be attractive for those closer to retirement too.
So, what is a dividend yield?
It's the amount of money you will receive from an investment, shown as a percentage. The dividend yield is worked out by dividing the annual dividend paid per share by a company by the cost of one share. As a stock's share price increases then its dividend yield decreases and as its share price decreases then its dividend yield increases.
For example, if a that costs £100 pays a £1.50 annual dividend, then the dividend yield is 1.5%
Let’s take a look at Lloyds Banking group as an example. As we can see below, Lloyds has a 'dividend yield' of 3.4% - That's relative to its share price of 66.18p meaning that it pays a yearly dividend of around 2.25p per share.
A 3.4% yield means that £100 invested in Lloyds would pay you £3.40 a year.
Dividend Yield investors search for stocks with a high dividend yield as a way of earning an income as they often don't have time for the compounding effect to take hold.
My investment strategy is a mixture of all of the above! This is how I'll be investing my money in 2017.
6.2 Buying shares - how it works
6.3 Pros and cons of buying individual shares
• Select individual shares for investment meaning you know exactly what you’re investing in and you can tailor each investment to suit your goals.
• Outperform savings, bonds and property over the long term.
• Picking dividend paying shares can set off a compound interest journey to financial independence.
• Lack of diversification can lead to very high risk.
- investing heavily in a company that goes on to face problems can easily lose you 50+% of invested capital.
• Individual shares can prove very volatile in the short term.
• Difficult to identify suitable shares for investment without the time and skills.
6.4 What kind of returns can I expect?
When it comes to buying individual shares, there's absolutely no way to predict returns. During economic downturns some investors who take significant risks can see their portfolio wiped out whereas more defensive investors can expect to see their portfolio value more than cut in half during a serious economic downturn. Over its 100 year history the FTSE100 has returned around 6% a year, but this has fluctuated over short periods. The key to stock market investing is time in the market
6.5 Where to invest money in individual shares
Picking a stock platform is very important. I really want to keep things simple here, so I made three tables outlining the offerings of three brokers positioned at different price points.
Waitrose level:Hargreaves Lansdown - More expensive but lots of bells and whistles
Sainsbury's level: Share Centre: Middle of the road option.
Aldi level: Degiro: Way cheaper than the above but minimal support and tough to use.
6.6 Frugal Student's view
Investing in the stock market is one of the riskier but also most rewarding investing options outlined in this book. When thinking of investing it's important that you think of the purchasing of assets on a permanent/long term basis as opposed of simply buying assets for a short period in the hopes of buying low and selling high.
If you feel that investing is right for you then remember to only invest with an amount of money you'd be comfortable losing and expect to lock that money away for at least 5-10 years but ideally, a lot longer.
For those new to investing, I recommend investing with Hargreaves Lansdown despite their high fees. Their platform is clean and easy to navigate. Hargreaves Lansdown also publishes regular stock market updates that can be useful background to the stock market. It may be a good idea for those thinking of investing in the stock market to start with funds and then ease into investing over time. Alternatively, monthly investments are a great way around big, risky lump sum investments when starting out.
Always be careful when it comes to fees. They can seriously dent your money in the long term - try to keep trading fees under 1%, ideally under 0.5%, of your investment.
Chapter 7: Investing in startups online
If you've ever watched 'Dragons Den' on TV, you'll know that there are countless business and people with business ideas out there seeking finance from investors. Instead of taking on debt, these business owners or inventors would rather sell a part of their business/idea in return for cash.
Traditionally, to invest, you'd need thousands of pounds, maybe even tens of thousands. Afterall, no business owner would be seriously interested in pitching his/her company for a pocket change.
But, thanks to the advent of the internet and crowdfunding, you can now buy shares of startup companies for as little as £10. This is because investing platforms such as Seedrs and CrowdCube allow business owners to pitch to a large pool of people en masse and to pool their investments into large sums of money.
Here's how it works.
7.1 Investing in Startups
7.2 Pros and cons of investing in Startups
• If a business takes off then returns can be substantial - CrowdCube delivered a return of over 25% (after tax relief) on companies that successfully "exited" - Made it past the start up phase into a successful business.
• Buying through an approved platform means that vetting is in place ensuring the company you're buying into is legitimate.
• Invest from as little as £10.
• FSCS covered.
(Note: If the platform fails you will receive your money back, this does not cover companies that you invest in failing.)
• The most popular platform -
• It could be a very long period of time before you could gain a return on investment.
• Illiquidity, shares can't be actively bought and sold.
• No ISA/Tax shelter available - Capital gains tax will apply to any profit made over your personal allowance of £11,000.
7.3 Where to invest money in startups
Having looked over the startup investment platforms I settled on a comparison between the two main players, CrowdCube and Seedrs.
Both are very user friendly platforms and easily navigable. My personal favourite is CrowdCube due to the substantially lower fees it charges across the board. Although Seedrs charges no investment fee compared to CrowdCube's 0.5% payment processing fee, I don't think that the 7.5% cut of any investment profits from Seedr presents a fair risk/reward balance.
7.4 Where to invest in startups
Although investing in startups has really spiked in popularity over the past few years, when it comes to the question of where to invest money in 2017, I don't think that they're a compelling option. Only a minority of startups end up successfully entering the 'exit' phase where investors have the opportunity to make a return on their investment.
It's important to note that these investments don't pay dividends so there's a real opportunity cost to your money. With the recent return to inflation in the UK, the risk of no guaranteed interest, dividend or growth make these investments especially risky.
If you do want to invest into startups I recommend that you spread your risk across several startups as opposed to investing heavily into one business.
Chapter 8: Conclusion
My investing journey started in 2013, when I got fed up of the tiny interest rates I was getting from savings accounts. Since then, I've gone on to grow my savings from £2,000 to £13,000 whilst studying at university. I've done this through frugality, hard work and smart investing. I'm passionate about getting more young people investing. This is why I researched and wrote this book on where to invest money.
With interest rates lower for longer it's more important than ever for investors to look for ways to protect their cash against inflation. It could be argued that bank accounts just don't cut it anymore. In this book I've worked through a range of ways in which investors can grow their wealth.
Investors should seek to diversify their investments and stay invested for a long period of time in order to reduce risk. It's also important to keep some money saved in a bank account for use in the event of an emergency. Remember that all but one option (NS&I premium bonds) in this book put your money at risk and you may receive nothing back from your initial investment.
Before you go, I'd also urge you to follow my journey to retire before forty years old through investing in dividend growth stocks at: www.frugalstudent.co.uk .
If you have any questions or queries then feel free to E-mail me anytime on: Lewys@frugalstudent.co.uk
Until next time
The Frugal Student
Where to invest money in 2017.
I'm not a licensed professional of any kind. I'm not a financial advisor, tax professional and am not accredited in any way by the FCA or any other Financial regulator/regulatory body. This book (Where to invest money in 2017) was written by myself and I have not received any sponsorship or funds of any kind for writing it. It contains no affiliate links. Nothing in this book should be viewed as advice. If you're facing financial difficulties you should seek advice from professional agencies such as the national debt line. This book should be viewed and read for entertainment purposes only. Before you invest any of your money, exercise, or undergo any financial, business, or personal changes at all, please consult an appropriate professional. Your investments may decline in value and you may get nothing back at all. Any stock transactions and/or platform analyses and comparisons I publish should not be considered to be investment recommendations. I am not liable for any losses or suffering experienced by any party or for any inaccurate information contained in this book as a result of error.