2020 has not been the year anyone expected and it has hit the UK economy hard. At the end of June, it was reported that 9.3 million people have been furloughed and only receiving 80% of their wages.
If you're looking to build up your wealth again, a savings account won't really cut it. Whilst there will be a small income from the accounts interest rate, inflation rates are usually higher, meaning your money is just sitting there and it won't be worth as much as the years go on.
We've put together our top five investment-based alternatives to simply putting money into a savings account.
1. Index Funds
These are used as a long term investment, where you would be putting money in for ten years plus. Index funds are portfolios of stocks and bonds, which follow the performance of a financial market index. Typically, they are a low-cost way to invest whilst providing better returns and helping investors achieve their goals more consistently.
Pros
They are passively managed.
Low fees, due to there being no active management.
Save money because less of the investment gains contribute to fees/expenses.
Cons
Lack of flexibility limits index funds to well-established sectors.
You can't duplicate the most successful fund managers' approaches.
2. Peer to Peer Lending
Although P2P has been around for over ten years, it has only recently gained popularity over the last few years, being recognised as a mainstream asset class. P2P lending brings together investors with borrowers via an online lending platform. This investment potentially sees higher return rates due to lower operating costs. But remember to choose your platform wisely!
The average annual return on peer to peer lending is over 10%.
Pros
Higher returns.
Manages exposure to risk by allowing you to spread your capital across multiple loans.
You can choose who you want to lend to.
You can access your money quickly if you need it (providing they can sell that loan position on).
Cons
Your money is at risk because it's not covered by the Financial Services Compensation Scheme (FSCS).
Any interest you earn in your investment is subject to tax deductions and you need to declare any interest earned on your tax return.
You won't earn anything while you are waiting for your money to be lent.
There is an overwhelming amount of choice.
3. Seed Enterprise Investment Schemes (SEIS)
When the Enterprise Investment Scheme was launched in 1994, it was as a way of encouraging investment into smaller companies. In 2012 SEIS was then launched to drive investment into start-up companies, offering tax breaks of up to 50% on income tax.
This used to be the main allure for investors, although it's interesting to note that in recent years SEIS has become a popular choice in its own right.
Pros
You can invest up to £100k into a number of different companies within a tax year and qualify for 50% tax relief.
There are a lot of start-up tech companies, which are considered a low-risk option for investors.
Cons
SEIS is considered high risk as start-up companies run a higher risk of failing.
The regulatory framework is very lax.
4. Physical Commodities
A physical commodity is anything that is considered a raw material that can be bought or sold, such as gold and silver. Many investors focus on raw materials when looking at physical commodities, which are in demand across the world. These are generally broken down into two categories: hard and soft. Hard commodities tend to be things that are mined, e.g. metals or energy products such as oil or coal. Soft commodities are things that are grown, such as wheat or cattle.
Investing in physical commodities is generally considered something that experienced investors buy into.
Pros
You can invest in a diverse range of commodity stocks, which helps to balance your portfolio - too much of one type of investment can prove extremely volatile.
The potential returns are high, especially where we have seen a rise in global infrastructure projects.
Physical commodities can act as a potential hedge against inflation.
Cons
Physical commodities can be affected by a number of variables, such as world events or import controls and therefore extremely risky.
You'll likely be investing in foreign and/or emerging markets, which come with their own risks.
5. Property
Property investment is a very popular avenue to go down and does provide huge returns when done correctly. Any type of property can be purchased as an investment property, so the possibilities are endless. You can also expand as much as you like; either sticking to one property or buying more and turning it into a business.
Pros
You can earn rental income if you buy a property to let out to others.
Capital growth benefits, if you buy at the right time, and your property increases in value.
It can be less volatile than shares.
It is a physical investment.
The average return on a property investment is between 6-10%.
Cons
Interest rates will affect your return and if the property market takes a dip, so will your investment.
Unlike other methods, you can't just sell off part of your investment if you need some quick cash.
You need to take into consideration the cost of the 'buying and selling' process involved with buying an investment property.
Normette Homes uses strategies that can help you double the average return of an investment property. Keep an eye out for our next blog where we explain how we can increase that return.
Whether you like a hands-on approach or prefer to take a step back when it comes to investing, we also offer different styles of property investment to suit you. If you'd like to discuss property investment options with us, click here to register your interest.
Disclaimer
The information available through Normette Homes is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of financial advice or recommendation by Normette Homes and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
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Normette Homes specialise in property investment and tenant sourcing.
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website: www.normettehomes.co.uk
