How do wealth managers work?
Welcome back to this series of six guides, written and produced in partnership with Dozens. This is number three – if you missed the first two, check them out here and here. These guides will set out everything you should consider as you set up your savings and make investments for the future – and, most importantly, how to take action today.
Part one: Investment wrappers
Part two: How much to invest
Part four: Rebalancing your portfolio
Part five: Choosing a provider
Part six: Pensions and retirement
These guides contain some specific tips for British Finimizers. If you’re in the US or somewhere else, never fear – we’re hoping to bring you your own special content very soon 😉
You’ve reached an exciting point. Your debts are sorted, your budget is organized, and (if you’re in the UK) you’ve picked a tax wrapper. You’re now faced with one of life’s best dilemmas: what should you do with your cash?
After rewarding yourself for your hard work so far with a nice but reasonably priced bottle of something, you’ve got a bunch of options to consider. Simply keeping the money under your mattress isn’t going to get you very far, thanks to inflation sapping its value over time. Instead, it’s smart to do something productive with it – to put the money to work delivering a return that grows your wealth 📈
There are three main things you can do with your money (beyond spending it, obviously): saving, investing, and trading. Each involves different levels of risk – and correspondingly high levels of potential return. How much weight you give to each depends entirely on your goal: someone seeking financial peace of mind will take a very different approach to someone who’s dead set on making millions overnight.
To properly pick your poison, you’ll need to understand the way each strategy works and the benefits and risks they offer. Thankfully, you’re in the right place: in this guide, we’ll give you the knowledge you need to figure out exactly how to split your cash. Soon you’ll be watching the returns fly in: parting with money never felt so good 💸
It’s not just Richie $ Rich: children everywhere know the value of saving. (Yes, Richie’s middle name was a dollar sign.) Occasionally drop some coins into your piggy bank, and a few months down the road you’ll have the joy of smashing open the porcelain porker and seeing your accumulated riches spill out onto the bed. RIP, Hamlet.
Saving’s simple in theory: you put money regularly to one side in the hope that out of sight means out of mind. And stashing the cash somewhere other than your main bank account – especially via an automatic post-payday transfer – means you’ll be less likely to spend it. Leave them for long enough, and thanks to the compounding effect (where any increases themselves generate more increases) those regular savings will soon grow.
Even if you’ve already set up an emergency fund to cover any financial shocks, saving can still be a good strategy to achieve a particular goal, whether that’s a holiday, a car, or even a house deposit. You can work backwards: for example, if you need £1,000 for a holiday in 12 months’ time, you’ll need to put aside £20 a week. Sun doesn’t seem so far away now, does it? 👙
You could keep using piggy, but it’s not ideal. Not only will you quickly run out of space, but the Bank of Bacon doesn’t pay out any interest. As inflation means that the value of your savings is constantly being eroded, you want to be earning at least some return on your money.
Savings accounts can help. They’ll pay you interest to keep your money with them – and providing it’s higher than inflation, the value of your cash will keep growing. You can choose between an easy-access account, which will let you make withdrawals whenever, or a fixed-rate account. Those make you lock your money away for a year or two, but will likely make up for it with a higher interest rate.
If you’re in the UK, you can also use some of the nifty tax wrappers we flagged in part one of this series to protect your gains from the taxman and get some nice bonuses too. If you’re saving to buy your first house, for example, a Help to Buy ISA is a savings account that gets topped up by the government when it’s time to transfer title 🏠
As mentioned, the best way to use any of these accounts is regularly. Set up automatic transfers from your main bank account and watch your savings magically grow over time. It’ll be your very own beanstalk, and you won’t even have to fight a giant at the end.
It’s worth noting that savings accounts aren’t perfect: the low interest rates they pay (2% annually is remarkable these days) mean your cash isn’t going to swell rapidly in size. If you’re after stronger returns in the medium term, you’ll probably need to look at investing or trading.
Investing can seem complicated, but the core idea is really straightforward. Investing is about putting your money behind things that you expect to grow in value over time: whether that’s real estate, in-demand items like barrels of oil or Beanie Babies c. 1997 – or, most commonly, shares of a company (a.k.a its “stock”).
As these investments get more or less popular their prices change – and if you’re lucky those changes will keep trending upwards. Some investments also pay out without you having to cash out: bonds offer regular interest payments (more on this below), and some stocks pay regular dividends. Staying invested over time can bring with it the prospect of big returns – but there’s no such thing as a free lunch. More money means more risk: you could get a nice payday, but unlike a savings account, your investments might also make a loss 😱
The options are truly limitless, but the most popular way to get started is with some kind of investment in big companies. You could do this by buying tiny shares of your favorite firm, but you’ll be putting all your eggs in a single basket. If things go wrong and the share price falls, you could be headed for a Humpty Dumpty-style wipeout…
A better move for new investors is to invest in a fund. These are essentially baskets of shares from different companies, so they let you spread your money across a whole range of different businesses in just one click. You can buy or sell many of these instantly: they’re called exchange-traded funds, or ETFs, and are a great way to get started. And if you’ve got a hunch – like the curved fruit market going bananas – you can even get quite specialized, investing in a fund that tracks companies in a specific country or sector 🍌
You don’t just have to invest in shares of companies (also known as equities). Bonds involve little old you lending money to companies or governments, who’ll thank you for the privilege with regular interest payments. Bonds tend to offer a smaller return than equities, but they’re more stable and (barring the lender going bankrupt) you should always receive your initial payment back at the end of the bond’s term, so there’s a lower risk of losses.
You can also invest in things like currencies and commodities – raw materials such as oil, gold, and sugar. But these are more complex options – and prospective investors should, like Jimi Hendrix, ask themselves: Are You Experienced?
For UK Finimizers, the best way to get started is probably by using your Stocks & Shares ISA allowance: this lets you invest a decent amount each year without getting taxed on your gains. Such ISAs are available from a wide range of providers, who then let you buy shares and funds through their platforms (although you don’t need to use an ISA to open an account). You can access loads of historical data to get an idea of how an investment has performed in the past – but as every financial platform loves to (OK, has to) warn, past performance may not be a guide to future results ☝️
Investing is all about making decisions for the future. Old salts like Warren Buffett talk about finding great companies, putting money into them, and leaving the cash there for as long as possible. With enough patience, your investments should grow healthily – over the past ten years, UK stocks have gone up by about 70% and US stocks by 230%, which isn’t to be sniffed at.
If you really can’t wait to get your hands on more cash, however, there’s another way…
If saving proceeds at a snail’s pace, investing is a slow and steady tortoise – and trading a mad March hare. It’s a high-risk, high-reward strategy. Traders don’t plan on holding their positions for years; often even days. Instead, they’re in ‘n’ out like a West Coast burger – briskly looking to buy low, sell high, and pocket the juicy returns in between 🍔
While investors often pore over the “fundamentals” of the things they buy (a company’s annual sales figures, for instance), traders aren’t too bothered about what they’re trading. All that matters to them are short-term market movements – which allow them to buy an investment (currencies are the most popular) and then quickly flip it for a profit when the price goes up. In the UK, small-time traders frequently deal in “contracts for difference” or “spread betting” rather than buying the often expensive investments directly.
Trading has the potential to bring really high returns in a very short space of time: if you get lucky, you can quadruple your money in the space of an hour. But you’d need to be really, really lucky. There’s a Monet-level blurred line between trading and gambling: often, you’re just speculating on which way the price of an investment will move, and things could go horribly wrong – especially if you “leverage” your trades and borrow money to boost the size of your bets 😬
One concept all aspiring traders should be aware of is the “efficient markets hypothesis”. The idea is that modern markets are perfectly efficient, meaning that anything it’s possible to know about an investment – from Apple’s quarterly costs to the likelihood of a new iPhone launch next year – is already reflected in that investment’s (e.g. Apple stock’s) price. Related to this is the “random walk theory”, which says that the only things that can shift investment prices are random events that no one could ever have predicted. In other words, trading is a game of chance.
This theory is very controversial: there’s no real agreement on its accuracy. Some traders swear by their ability to make money off news and rumors. Others claim that undertaking “technical analysis” – looking at trading history and reading this across to the future – means they can back a winner. Some people may well have made a mint from trading, but many others will have been left with a sour taste 🤢
There’s yet another risk worth mentioning, which is that trading will pit you against some serious operators. Professional traders spend millions hooking up ultrafast cables to stock exchanges, just so they can trade a few microseconds faster than you, and many now use complicated algorithms that automatically crunch data and trade on it. If you can make like John Connor and beat the robots, fair play to you – but it won’t be easy.
Before you do anything with your money, you need to figure out your goals. Do you want money for next month, next year – or for retirement? Do you want massive returns or just a little extra change? You also need to figure out your risk tolerance. Would it be a disaster if you lost some of your cash, or are you willing to gamble for a shot at better returns? 🎰
Putting your money to work is a trade-off. You can have low risk, good returns, or a short time horizon – but not all three. If you have a low-risk tolerance and want a bit of extra money in a year or two, savings are your best bet for a stable return. If you can wait a bit longer, investing is a better choice: you’re taking on more risk, but over a long enough period of time (five to ten years, say) you should see gains that’ll beat anything you can get from savings accounts. If you want a high return quickly, meanwhile, trading is the only thing that could deliver – but as we’ve said, this is extremely risky.
Of course, you don’t just have to stick to one strategy – in fact, you probably shouldn’t. As with superheroes, combining the strong points of two or three is a really smart idea. Consider maintaining an easy-access savings fund for occasional big purchases, but paying regularly into a larger long-term investment account that will hopefully fund your retirement. If you really want to, you can also set up a small trading account for a bit of fun on the side 👍
These shouldn’t be set-it-and-forget-it decisions. Your goals will change over time, and so will the economic landscape (if savings rates are really low, you might want to put more into investments). And the best way to ensure your cash grows over time is to regularly add to it: setting up small weekly or monthly payments into your savings and investment accounts will have you on the road to riches before you know it.
In part one of this series, we explained the first step in figuring out your future finances – protecting the value of your money from inflation in a tax-efficient way, while making sure you can get access to your cash as and when you need it.
In part two, we explored what to do before investing, talked through how to work out how much you’re able to invest, and looked at the benefits and drawbacks of investing all at once or over time.
And in this guide, we’ve laid out the differences between saving, investing, and trading, and how you can strike a balance between the three when putting your money to work.
Next up, part four looks at the different ways to “rebalance” your investment portfolio over time – adjusting your bearings after market movements to keep your ship on course. All aboard… 🚢
This guide was produced in partnership with Dozens.
Dozens is not a bank. They are authorised by the Financial Conduct Authority as an e-money institution (FRN 900894) and also as an investment firm (FRN 814281). The card is issued by Wirecard Card Solutions Ltd pursuant to licence by Mastercard International.