Getting the most from your money means putting it in the right place. But it’s not always easy to know where this is. If it were, then everyone would do it, and the value of the investment would dwindle.
Sound investment is, in most cases, a matter of knowing where the risk lies, and taking steps to minimise it. The more informed you are, the more informed (and ultimately profitable) your investments will be.
Know the Market: Inflation, Interest Rates, and Their Impact
So, what kinds of information matter? It’s worth starting with the fundamentals.
To begin with, there’s inflation. In the UK, this is projected to hover around 3.7%. This means that the price of the average asset will rise by around this much over the course of a year. It’s a measure of the diminishing purchasing power of the pound. Of course, different assets will be affected differently by inflation. Some assets, like gold, have a special relationship with broader inflation, as they’re seen as a ‘safe haven’ when the value of fiat currencies is being eroded.
In order to keep inflation under control, the Bank of England’s Monetary Policy Committee adjusts the base rate of interest (the so-called ‘Bank Rate’). This is the amount of interest paid on savings that commercial banks hold with the central bank. As such, it’s a means of controlling consumer spending. When spending is too high, and pushing up inflation, Central Banks offer higher rates of interest in order to encourage saving, and thereby cool spending.
Interest rates and inflation are important measures of the overall health of an economy and the investing environment it presents.
Use Stocks to Build Long-Term Wealth
In the long run, stocks offer a compelling vehicle for wealth creation. Invest in a number of stocks, and you’re entrusting a select group of companies with money, which they will spend in order to generate a profit. The value of your stocks will change over time, and you’ll also get the occasional dividend.
Stocks are reasonably volatile, which means that their value might fluctuate in the short term. These fluctuations can allow traders to sell and buy, and earn huge salaries – but for most investors, a long-term strategy is a better, less risky one.
Explore Crypto with a Strategy
Cryptocurrencies are notoriously volatile. The price of the most popular one, Bitcoin, can fluctuate wildly over the course of a single day. Despite this, many are drawn to this world, thanks to its decentralised, libertarian approach to finance.
Investing in crypto carries with it some inherent risk. The price of a coin might dwindle to zero, especially if it’s not an established player. It’s also worth being aware of cryptocurrency scams. If you don’t understand exactly how blockchain and wallets work, then you’ll want to stick to reputable platforms, and pay attention to updates from the Financial Conduct Authority.
Diversify Your Portfolio Beyond Your Business
You might lower risk by diversifying your investment portfolio over many different stocks, many different sectors, or even many different asset classes. This is a way of putting your eggs into many different baskets. If you aren’t sure of how to do this, then you might look into specialised investment training, which is available online.
Stay Ahead with Tax Rules and Investment Education
If you realise (that is, sell) an investment and earn a profit, then you’ll be liable for Capital Gains Tax on that profit - if those gains take you above your tax-free allowance. Any sensible investment strategy should therefore account for this cost, and seek to minimise it. The way this works for digital assets, like bitcoin, is relatively complex – you’ll need to group your tokens into pools, and record them all. If you fail to report your winnings, you could be guilty of tax evasion.
