The Best Place to Invest Right Now

Average return: 2%-5%

Risk level: Medium to high

Here, you invest in a diversified portfolio of dividend-paying stocks. Dividend stock funds work by having investors purchase shares of the fund, which pools money to invest in a variety of companies that distribute regular dividends.

They offer the potential for regular income through dividend payments and the opportunity for capital appreciation over time. You can invest in them through brokerage accounts, mutual funds, or exchange-traded funds (ETFs) specializing in dividend stocks.

Average returns: 5%-7%

Risk level: Medium to High

These funds are stocks of companies that are considered undervalued relative to their intrinsic value. Fund managers analyze companies and select stocks believed to have the potential for price appreciation over the long term.

What makes value stock funds stand out is their potentially significant and surprising long-term growth. There is a great opportunity for capital appreciation over time. However, it's hard to pinpoint their potential ROI (which is why we noted their average returns as N/A).

Average returns: 11%

Risk level: Medium

Index funds that track real estate investment trusts work by having an investor pool their money and invest in a wide range of real estate properties. They invest in a diversified portfolio of real estate assets, such as commercial properties, apartments, or hotels.

REIT index funds offer exposure to the real estate market and potential income through dividends and long-term capital appreciation.

Average returns: 7.51%

Risk level: Low

S&P 500 index funds replicate the performance of the S&P 500 index, which tracks the performance of 500 large U.S. companies.

These funds offer diversification across major U.S. companies and have historically provided strong long-term returns. In fact, due to the size of the index, it provides diversification across the widest variety of industries and sectors.

Average returns: 16%

Risk level: High

Similar in function to the S&P 500, the Nasdaq-100 index funds aim to replicate the performance of the Nasdaq-100 index, which includes 100 of the largest non-financial companies listed on the Nasdaq stock exchange.

Also, similar to the S&P 500, it offers a great deal of diversification, specifically through technology and growth-oriented companies. However, unlike the S&P 500 index, it is very volatile.

They can be a good long-term investment if you are willing to ride out their volatility periods and drops. The index always recovers, but when that happens can be difficult to predict.

Average returns: 1.18%

Risk level: Very low

ISAs (Individual Savings Accounts) are tax-advantaged savings accounts offered in the UK. They allow individuals to save money without paying tax on interest earned.

Cash ISAs provide stability and security for individuals who prefer low-risk investments and want to protect their capital while earning tax-free interest.

Average returns: 7.78%

Risk level: Low

A precious metal that has been used as a store of value for centuries, it's one of the most ancient ways to invest.

It can be purchased in various forms, including bars, coins, or through exchange-traded products (ETPs).

Gold is often considered a safe-haven asset and can serve as a diversification tool within a portfolio during times of economic uncertainty. Now, its value fluctuates based on supply and demand dynamics, investor sentiment, and economic factors. Still, it is most often used as a kind of hedge against inflation and currency fluctuations.

Its average returns are based on the last 50 years. Furthermore, it's a low-risk investment for the long term, but mid to high in the short-term.

Average returns: 5.2%

Risk level: Low

Bond funds are investment funds that pool money from multiple investors to invest in a diversified portfolio of bonds issued by governments, municipalities, or corporations.

They can provide a regular income stream through interest payments and potentially offer capital preservation. These funds are considered less volatile than stocks and can serve as a diversification tool within a portfolio.

Average return: 4.35%

Risk level: Low

High-yield savings accounts are bank accounts that offer higher interest rates than traditional savings accounts.

These accounts offer liquidity, security, and a modest return on funds that may be needed in the short term. They are suitable for individuals who prioritize capital preservation while earning a competitive interest rate.

Average return: 2.5%

Risk level: Low

Money market funds are mutual funds that invest in short-term, low-risk securities such as Treasury bills, certificates of deposit, and commercial paper. The fund invests in these low-risk securities, aiming to provide stability and liquidity.

They offer relative stability, capital preservation, and quick access to funds. You should aim for one of these if you are looking for short-term investments with minimal risk and a modest return.

Average return: 1.63%

Risk level: Low

Short-term certificates of deposit (CDs) are time deposits offered by banks or credit unions. They have fixed terms and pay interest over the duration of the CD.

Individuals deposit a specific amount of money in a CD for a fixed period, typically ranging from a few months to a few years. The bank pays interest on the CD, and funds are inaccessible until the CD matures.

Individuals can invest in short-term CDs by opening accounts with banks or credit unions that offer these products.

Average return: 2.55%

Risk level: Low

These are mutual funds that invest in a portfolio of short-term bonds issued by corporations. They offer the potential for higher returns compared to traditional savings accounts while still maintaining a relatively low level of risk.

Potential investors can invest in short-term corporate bond funds through brokerage accounts or directly with mutual fund companies.

Firstly, the most important thing you need to be aware of is your risk tolerance.

Risk tolerance refers to your ability and willingness to endure fluctuations in the value of your investments. It varies from person to person and depends on factors such as financial situation, investment knowledge, time horizon, and emotional resilience.

The best way to get an understanding of your risk tolerance is to:

• Assess your financial situation - Evaluate your financial resources, including income, expenses, debts, and emergency savings.

• Determine your investment knowledge - Consider your understanding of different investment options and your comfort level with potential risks.

• Define your investment goals - Clarify your financial objectives, whether it's capital preservation, growth, income generation, or a combination of these factors.

• Seek professional advice - Consult with a financial advisor who can help you in assessing your risk tolerance and guide you towards suitable investment strategies.

In investment terms, time horizon refers to the length of time you hold an investment before accessing the invested funds. It impacts the choice of investments as longer time horizons allow for more growth-oriented strategies.

In order to figure it out, there are several actions you need to take. First of all, determine the specific financial goals you aim to achieve within different timeframes. Then, select investments that align with the respective time horizons for each goal.

Finally, ensure that the investment can be accessed when needed without significant penalties or restrictions.

Most of the above investments come with some sort of tax requirement. However, UK citizens can invest in an ISA and "protect" their long-term investment from taxes.

A Stocks and Shares ISA, also known as an Investment ISA, is a type of Individual Savings Account. It is designed to encourage individuals to invest in a wide range of eligible financial products, including stocks, bonds, funds, and other securities.

Any income generated within a Stocks and Shares ISA, such as dividends or interest, is exempt from income tax. Additionally, any capital gains made from selling investments held within the ISA are exempt from capital gains tax. The same goes for making a withdrawal.

However, you need to be aware of the Annual ISA Allowance.

Each tax year, there is a maximum amount of money that can be contributed to an ISA, known as the ISA allowance. As of the 2023/2024 tax year, the annual ISA allowance is £20,000.

Building an effective investment plan is not easy. There is no universal rule, so you need to consider a couple of things.

Determine How Much You Can Afford to Invest

Assess your financial situation. Evaluate your income, expenses, and existing financial obligations to determine how much money you can allocate towards investments.

Next, calculate your disposable income. Subtract your essential living expenses and financial obligations from your income to determine the amount available for investing.

Finally, something we already mentioned in the article beforehand - Consider your risk tolerance.

Assess how comfortable you are with potential fluctuations and losses in your investments. Your risk tolerance will influence the allocation of your disposable income towards different investment options.

Fight the Urge to Spend Your Savings

A very common issue for any investor is maintaining discipline and fighting the urge not to dip into the fund.

Something we believe can help are:

• Establishing an emergency fund -Before investing, ensure you have a separate savings account to cover unexpected expenses or emergencies.

• Practice disciplined saving - Set a budget and make a habit of saving a portion of your income regularly. Automating savings through automatic transfers or direct deposits can make it easier to resist the temptation to spend.

• Prioritize long-term goals - Remind yourself of your long-term financial objectives and the benefits of staying committed to your investment plan. Above all focus on the potential future gains rather than short-term spending temptations.

Set Reachable Goals

Unrealistic goals will put too much pressure on yourself, and will sap motivation when you see how difficult things you have set for yourself.

In order to set achievable and reachable goals, you should:

• Define your financial goals - Determine what you aim to achieve through investing, such as saving for retirement, buying a home, funding education, or building wealth.

• Make goals specific and measurable - Set clear targets with a specific amount and timeline. For example, aim to save a certain amount for retirement by a particular age.

• Break down large goals into smaller milestones - Divide long-term goals into smaller, manageable steps to track progress and stay motivated along the way.

Dreaded inflation is always on the would-be investors' minds. This is made all the more important by having the UK face the highest inflation rate in almost half a century last year.

Inflation refers to the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of money. When inflation occurs, the same amount of money can buy fewer goods or services than it could previously. But let's illustrate that with a direct example:

*Data derived from ONS

Now let's imagine you saved the money you would have spent on a pint of milk, and how much it would have grown during that same period.

As you can see, even though your savings have increased, they did so only slightly. On the other hand, the purchasing power of your savings has decreased to such an extent that it has almost halved.

Of course, this doesn't refer to every product. However, we do believe that it is an excellent illustration of how inflation can eat away at your savings.

In contrast, let's talk a bit about compounding.

It is a powerful concept in investing that allows your money to grow exponentially over time. It involves earning returns not only on the original investment but also on the accumulated interest or gains from previous periods.

It works by reinvesting your investment returns, including both the initial principal and any accumulated earnings. As your investment generates returns, those returns are added back to the principal, creating a larger base for future growth. Over time, this compounding effect snowballs, and your investment gains generate even more gains.

Here is an example, again using the price of milk.

The table above is something of an extreme example. It's under perfect conditions, over an exceptionally long period of time, with no interest rate variance or contributions and withdrawals.

Let's provide another example with some cleaner and larger numbers.

Let's consider an investment with an annual return of 8%. After the first year, your £10,000 investment would grow by £800 (8% of £10,000). In the second year, the 8% return is applied not only to the initial £10,000 but also to the £800 earned in the first year, resulting in a return of £864 (8% of £10,800). This compounding process continues, and over time, the growth accelerates.