Investing Archives - Learn with Octopus Money

Investing should be as boring as watching paint dry.

We’ve all seen the headlines where someone goes from relative obscurity to being a millionaire seemingly overnight because of one lucky investment.

‘Get rich fast’ schemes and scams attract people for a reason – we know what we want and we want it NOW.

But that’s not the reality for most investors. In fact, most wealthy people get rich slow.

Even Warren Buffett, one of the world’s most well known and successful investors, who began investing when he was 11 years old, didn’t become a millionaire until he was 30 years old. Read that again. That means he was investing and making money moves consistently for 20 years to get to his first million. And then he didn’t become a billionaire until he was 50.

But those stories don’t get as many clicks…

Here are our 3 tips for how you can make your money grow without putting it all on the line.

Be in it for the long run

Humans aren’t great at planning for the long-term and for the future. You might think investing for 20 or 30 years to become a millionaire takes too long. But to get the State Pension (currently £10,600 per year in the 2023-2024 tax year), you’ll have to have worked and contributed to your National Insurance record for 35 years.

It’s easy to feel confident when our investments are doing well and we’re in the green. But as soon as the markets start to drop and the numbers in our account go red, we want to cut our losses and may be tempted to sell. This can happen even to the most experienced investors with nerves of steel. But your losses (like your gains) aren’t actually realised until you sell. So if you ride out the headlines, you at least have the chance of seeing your investments recover. Whereas if you sell, you definitely don’t have the chance of seeing your investments recover.

Of course, sometimes selling in a market downturn might be necessary or the right thing to do. It all depends on your personal circumstances and what you’re investing for.

Diversify. Diversify. Diversify.

People who are new to investing often think that investing is the same as gambling. This is usually from stories of people who have lost everything by betting everything on one stock or maybe cryptocurrency. People looking for excitement may try to ‘beat the market’ by day trading or throwing everything into alternative investments. In doing this they take on too much risk – more than they can handle – and if things don’t go well, they can end up with nothing, or worse, in debt.

This is where diversification and understanding your risk profile comes into play. Index Fund millionaires – people who have become millionaires simply from investing in low-cost index funds – exist for a reason. People who consistently invest in low-cost, diversified funds that track the market regularly outperform day traders and fund managers in the long run. Index funds and Exchange Traded Funds (ETFs) aren’t seen as very exciting, but they’re an excellent way to achieve long-term financial goals like financial independence.

Automation is your best friend

Money is closely tied to our emotions and our self-worth.

If you’ve ever bought something with the intention of wearing or using it ‘one day when,’ or thinking ‘I’ll be happy when,’ then you’ll know the feeling of spending money being tied to how we feel about ourselves.

We might spend more money when we feel down or sad. We might spend more money in the hope that it will make us a different person, and make us happy. This is where many of us might stumble in our budgeting or when it comes to investing.

We can be our own worst enemy when it comes to our future finances.

This is why paying yourself first by setting aside a certain amount of money to invest each month is so important. Make it automatic by setting up a direct debit into your investing account every payday.

We’ve said it once and we’ll say it again. Investing should be as boring as watching paint dry.

Go get your excitement doing the things that bring you joy instead.

*With investing your capital is at risk. Your investments may go down as well as up, and you may get back less than the amount you invested.

You may have heard lots of stories about investing, some good and some bad (some VERY bad). The truth is investing is a powerful way to grow your money and help prevent inflation from eating into your savings.

‘But how do I actually invest?’ ‘Where does all the money go?’ ‘What do you mean I have to pay tax when I sell my investments?’ ‘What on earth’s an ISA?’ These are all just some of the questions you might be asking yourself. We’ve all been there. And this webinar is here to help.

More people are talking about investing than ever. And investing is easier and more accessible than ever.

Investing is one of the best (and easiest!) ways of growing your money in the long-term. In this session we’ll prepare the groundwork so you can learn how to make your money work for you.

Property investing has always been an attractive avenue to grow and diversify your investment portfolio. (As a recap, an investment portfolio is just a group of financial investments that you own. For example stocks, bonds, commodities and cash.)

In the UK this is commonly done though purchasing a buy-to-let property. As the name suggests, a buy-to-let property is one that you buy not to live in but to rent out. Many people assume that they’ll make money by renting the property out to tenants.

Many people prefer it to investing in stocks and shares as it’s a tangible asset, so they find it easier to understand.

But, it’s important to carefully consider a few different things when investing in property. For example, there are different rules for purchasing investment properties than properties you live in.

The minimum deposit when buying a property to let is usually 25% of the property value. That’s a much bigger upfront payment than if you’re investing in stocks and shares.

Buy-to-let mortgages can be difficult to get and are more expensive than homeowner mortgages. Higher interest rates could also make the investment not profitable to begin with. So it might take some time for you to start earning extra money with this.

You’ll need to pay an extra 3% surcharge on stamp duty on top of the standard charges.

It’s a good idea to have savings of at least 6 months of mortgage payments and maintenance costs. This is called a buffer fund and will help you cover costs if the property is vacant for some time if you can’t find a tenant to rent it.

Owning a property can be a lot of work. You also need to think about the time and cost required as a landlord to maintain the property and fix any issues raised by tenants.

You’ll need to factor in income tax on rental profit you receive from your rental property. Rental profit is what you’re left with after you’ve added your rental income and subtracted any allowances and expenses you have from renting the property. The rental profit is taxed at the same tax rate as your employment income. Your rental profits get added to any other income you earn, which means you could get pushed into a higher tax bracket. It’s best to speak to a tax adviser to understand what your tax costs would be in this kind of scenario.

Finally, house prices can go up as well as down. If your property has gone up in value, you’d also be subject to capital gains tax. For properties, you’d pay 18% capital gains tax as a basic rate taxpayer versus 10% for other assets, and 28% capital gains tax as a higher rate taxpayer versus 20% for other assets.

As with any investment, it’s important to make sure that the type of investment you’re choosing is right for you and your situation. Tax rules can change so make sure you’re up to date with the latest information before making a big decision like investing in a buy-to-let.

A Lifetime ISA (Lifetime Individual Savings Account or LISA for short) is a tax-efficient savings account with the purpose of helping people buy their first property or save for retirement.

You can save up to £4,000 each tax year and get a 25% bonus from the government added on top of what you save. If you save the maximum of £4,000, you could get up to £1,000 for free each tax year.

This £4,000 is part of your £20,000 annual ISA allowance, so if you use the full £4,000, you’ll only be able to save £16,000 across your other individual savings accounts.

What to consider before opening a Lifetime ISA:

You must be a first-time buyer, which means you’ve never owned property anywhere in the world before. Also, if for example a family member added your name to the deed to their home, you wouldn’t be able to use a Lifetime ISA to buy your house.

You also have to buy a property that you intend to live in and the price of the property can’t exceed £450,000.

You’ll pay a penalty if you withdraw the money from a Lifetime ISA and don’t use it for your first property. An alternative is to keep the money for retirement, but you wouldn’t be able to access the money until the age of 60. If you’re a higher rate taxpayer, it’s better to use your pension to save for retirement rather than a Lifetime ISA.

Anyone between the age of 18 and 39 can open a Lifetime ISA. You can continue contributing to your Lifetime ISA until the age of 50.

You need to open and hold a Lifetime ISA for at least 12 months before you can access the money for your first property. So if you’re planning to buy in the next year, it’s not a good option for you.

There are two different accounts to choose from. You can open a Lifetime Cash ISA or a Lifetime Stocks and Shares ISA. With the Lifetime Cash ISA, you can earn interest tax-free. This is the best option if you plan to buy property within the next 5 years. You can also open a Lifetime Stocks and Shares ISA and earn capital gains and dividends tax-free. This is a good option if you plan to buy property with more than a 5 year timeframe.

‘I’m too young…’ ‘It’s too late…’ ‘I don’t have enough money…’ ‘The stock market’s going to crash and I’ll lose all my money…’

Do any of these cross your mind when you think about investing? If so, you’re not alone. Most people wonder about all of this and more before they start their investing journey.

The idea of investing freaks me out…

If you think about it, when you contribute towards a workplace pension, you actually already ARE an investor. Your pension money is invested into funds by your workplace pension provider. That’s how it grows over the course of your career, ready for you to access once you reach retirement age!

Starting to actively invest your money should feel a little less scary now…

How do I know if I’m ready to invest?

So, how do you know if investing is the right step towards securing your financial future?

There are a few things you need to do to prepare for this next stage:

Pay off your high-interest debt first – paying off things like credit card debt before investing is really important, because your debt will keep increasing at the same rate each month until you pay it off.

Have a fully funded Emergency Fund – this is typically 3 to 6 months’ worth of salary to cover any emergencies and unplanned expenses that might crop up unexpectedly. Having this means you won’t need to sell your investments to pay for them, so you can have peace of mind.

Make sure you’re only investing money you won’t need for at least the next 5 years – because the stock market goes up and down on daily basis (this is totally normal), but generally goes up over time, the longer you can leave your money invested, the better.

Know your risk profile – this will help you choose the right type of investment for you. Some people are really comfortable with seeing the value of their investments go up and down quite sharply and prefer a high risk, high return investment. Others are less comfortable with that and can then choose investments that will be more stable, but might offer lower returns.

Be prepared to weather the ups and downs of the market – it’s not easy seeing your portfolio go into the red, but stay the course. You’ll only lose money if you sell at that moment. If you don’t sell, you haven’t actually lost any money. And then you always have the chance of seeing those investments grow in value and go up again. As long as you’ve diversified your investments, you’ll be ok!

If you’ve checked off all 5 of these things, you’re ready to invest!

You don’t have to invest hundreds or thousands of pounds to start anymore. Investing has become really accessible, and it can be done from as little as £1 these days.

It’s always better to start investing earlier rather than later. But it’s never too late to start, as long as you won’t be needing that money in the next 5 years. Investing is something you do for the long term, to future-proof your money for future you.

There’s a time and a place for cash savings and a time and a place for investments. One of the key distinctions between each is your timeframe. Typically, savings are great for short-term goals within the next 5 years, and investments are great for medium and long-term goals with a timeframe of longer than 5 years.

What do I need to do to start investing?

When it comes to financial planning, it’s important to make sure you’ve cleared your high-interest debt (like credit card debt) and have built an emergency fund of at least 3 months’ worth of salary before you even think about getting started with investing. The reason for this is so that you don’t need to access your investments at a bad time due to needing cash for an unexpected cost or emergency.

Once you’ve built up your emergency fund, you can consider your other plans and goals and the timeframes for each.

The long, the short and the in between

For short-term goals that you plan to do within the next 5 years, such as holidays and house renovations, it’s important to have easy access to your money. The best way to do this is to keep that money in a savings account. Find out more about the different types of savings accounts here.

Interest rates can vary between banks and building societies, so do a bit of Googling and find the savings accounts with the best interest rates available to you. Easy-access savings accounts give you easy access to your money whenever you need it, but you might not be getting the highest interest rates. Fixed-term savings accounts can give you higher interest rates, but you’re usually committing to locking away your money for a certain amount of time. So it won’t be as easily accessible to you if you need it.

For medium and long-term goals where you don’t need to access your money for the next 5 or more years, it’s important to consider investing so you can aim to beat inflation. Savings tend to lose value due to inflation, which reduces your buying power over the long term. Investments can go up and down, but tend to yield higher returns over the long term. Investing can also help give you more financial independence in the future as it can supplement your savings and pension.

Inflation. It seems to be all anyone’s been talking about since last year. But what is it exactly, and how does it impact your day-to-day life?

Understanding inflation will help you take the steps you need to understand your money and make sure you’re future-proofing your money for ‘future you’.

Healthy economies grow over time, so in economics terms, a ‘recession’ is a decline in economic activity.

In the UK the definition of a recession is: two consecutive quarters of negative economic growth. So if the economy gets smaller for 6 months in a row, that’s a recession.

Fun fact for your next pub quiz: US economist Julius Shiskin coined this definition of a recession in 1974.

What happens in a recession?

What usually happens in a recession is that a country’s GDP (Gross Domestic Product – which is used as a measure of how rich a country is) goes down. Unemployment goes up, manufacturing goes down and spending goes down. What that means is…fewer people in work and less general spending, which means less demand for goods and services so companies have less incentives to manufacture products.

What causes recessions?

Recessions can happen for a number of reasons. They can be caused by a sudden economic shock, like the recent Covid-19 outbreak in 2020. They can be caused when governments have too much debt, or when asset bubbles are created and burst (for example the housing bubble that popped in 2008 or the dot-com bubble of 2000). Too much inflation or too much deflation (like Japan faced in the 1990s) can cause recessions. And even new inventions and technological change can cause recessions.

Because global economies and supply chains are so closely linked these days, recessions can affect many countries all at the same time.

What does a recession mean for me?

A recession isn’t the same as a depression. These tend to be more severe and last longer. A depression can last for several years. A recession usually lasts for a few months or a year or two.

Interest rates are usually higher in a recession. This is great news for savers, as you’ll get more money in interest in your savings accounts. It’s bad news for borrowers, like anyone with a variable-rate mortgage or credit card debt, as it means your monthly repayments will increase.

Higher interest rates mean people are encouraged to save rather than borrow or spend. This means less money is circulating in the economy, which impacts individuals and businesses.

Because people spend less money on goods and services, businesses have less money coming in. So they tend to look at reducing their costs. This can mean laying off staff or hiring freezes, so unemployment is usually higher in a recession.

Stock prices tend to go down in a recession, so if you invest in the stock market, you might see the value of your investments decreasing.

Should I be worried if the UK economy is in recession?

Because economies have cycles of growth, recessions happen in cycles and are a normal part of any economy. Cast your mind back to 2008 and 2020 – this isn’t your first recession rodeo, and it won’t be your last. But the good thing is that recessions always come to an end.

The thing is we never know how long one will last. The Bank of England and other financial institutions have predicted that the UK will be in recession in 2023 and that it’ll last until mid-2024. But economic forecasts aren’t set in stone. So no one knows if this will happen or not, or how long it will last if it does.

The most important thing to remember is that recessions are a totally normal part of any economy. There are some things you can think about to prepare for any kind of recession, like paying down debt and making sure you have an emergency fund to fall back on.

Your emergency fund is typically 3 to 6 months of living expenses saved in a bank account that you can easily access – this will save you a lot of stress. You might also want to check and update your budget to make sure it still works for you. If you’ve been thinking about changing jobs, you might want to put that plan on hold for a bit, or be prepared for finding a new job to take longer than when the economy is growing.

In conclusion…

Recessions can be unpredictable, but we do know that they happen in cycles, so you’ll probably experience at least one in your lifetime. They’re never fun, but they do pass. Having an emergency fund and being aware of the money coming in and going out of your accounts (aka a budget) will go a long way to helping you weather the storm. All storms in time blow themselves out, and any recession will too.

One of the first steps to take before you start investing is to determine your risk profile.

To check your risk profile, it’s helpful to complete a risk profile questionnaire. As an Octopus Money client, you can head to Propeller to log in and fill out yours.

Tell me more…

Risk profile questionnaires are made up of questions that help you identify the risk required to reach your investment goals, your risk capacity and your risk tolerance.

Risk required is the amount of risk you’d need to take to achieve the level of expected return you want. The amount of return you want will depend on your investment goals.
Risk capacity is how much risk you can afford to take. This depends on factors like your income, your savings, your emergency fund and your timeframe for investing.
Risk tolerance is your attitude to risk, which means your sensitivity to the value of your investments going up or down.

Based on your result, you’ll know your risk profile. And this will help you choose a portfolio with the right balance of assets for your goals. It’ll also give you an idea of how much return you can expect.

How many risk profiles are there?

Generally, there are three risk profile categories:

Aggressive: This is for investors who have a high risk tolerance and are happy to accept high levels of volatility and potential losses for the chance of higher returns. These portfolios are focused on growth and are mostly invested in stocks. This works for investors with a long timeframe. This type of risk profile is high risk, high reward.

Moderate/Balanced: This is for investors who are looking for an average level of stability and are happy to have moderate levels of volatility for the chance of stable returns. These portfolios usually have a strategy focused on balancing growth with assets that generate income. This works for investors with a medium to long timeframe. This type of risk profile is medium risk, medium reward.

Conservative: This is for investors who want to keep their money stable and reduce any volatility in their investments. They’re willing to accept lower returns in order to have more stability. These portfolios have a strategy focused on income generating assets with low exposure to growth and equities. This works for investors with a short timeframe. This type of risk profile is low risk, low reward.

In case you’re wondering, there’s no right or wrong risk profile to have. Your profile just depends on your personal situation, your personality and what you’re comfortable with.