When investing, it’s important to have a plan and specific goals.
Investing is the process of putting money into assets with the expectation of earning a return. The goal of investing is to grow your money over time so that you can reach your financial goals, such as retirement, a down payment on a house or paying for your child’s education.
There are many types of investments available, including stocks, bonds, mutual funds, real estate and precious metals. Each type of investment has its own risks and rewards, so it’s important to carefully consider your financial situation and goals before investing. But here are a couple of products that you’re likely to come across.
I will caveat this with the fact there are other types of investments, like crypto or peer-to-peer lending. The latter was once explained to me as, “If investing in your pension is having one glass of wine each month, investing in peer-to-peer lending is injecting heroin,” or words to that effect. So let’s explore the types of wine.
Index funds are mutual funds that track a specific market index, such as the largest 500 companies in the US, the S&P 500. They are a low-cost way to invest in a broad range of assets. These are a basket of companies in a particular market, such as in the US or UK (known as the FTSE). Buying these funds means you buy a tiny sliver of each of the companies in the fund in a predetermined ratio. These funds track the entire market, so can be simple, low-cost and relatively diversified.
ETFs are similar to index funds, but they trade on a stock exchange, just like individual stocks. This makes them more liquid than index funds, which can be beneficial for investors who need to access their money quickly. With ETFs, you own a share of the ETF rather than the individual companies, but still benefit from their price appreciation. These are often easy to buy and sell and, therefore, are accessible on investing apps such as InvestEngine.
Bonds and fixed-income products are debt securities issued by governments or corporations. You essentially loan the company or government money in exchange for a guaranteed return, or yield. They are generally considered lower risk than stocks and provide predictable income. Many platforms allow you to buy individual bonds, certificates of deposit (CDs) or bond funds/ETFs.
Investing in markets through funds or ETFs tends to be more volatile than bonds, so while there is a higher return to be made, there is also a risk that you could lose money. The bond market has been volatile in the last few years, but that isn’t usually the case. For example, over the 10-year period from 2015 to 2024, the S&P 500 returned nearly 13 percent annually, while corporate bonds returned only about 3.4 percent due to the low-interest-rate environment of that era. Inflation over that period averaged 2.86 percent, fluctuating between 0.1 percent in 2015 and eight percent in 2022. So in some years, bonds would have outperformed inflation while they wouldn’t in years such as 2022.
The right product for you depends on your goals, risk tolerance and time horizon. If you’re young, you can afford to lock your money up in the market for longer and take some losses in order to make a long-term return. If you’re looking to retire sooner and need to protect your money against inflation, bonds may be the best asset class for you.