This is not the easiest question to answer if you’re still new to the world of investing.
So before we dive into the details, let’s dispel a few myths about what it means to be an investor in 2022!
You can start with much smaller amounts and gradually grow your investment portfolio over time. The value of your investments doesn't just grow because of the money you put in. Compounding - when your investments earn interest on the interest they've already accumulated - has a powerful effect on the value of your investments after many years (typically at least 10 years but especially 20 years+).
There’s no need to be on ‘first-name terms’ with senior investment bankers or have expertise in behavioural finance to become an investor today. But if you’re new to investing and would struggle to distinguish an ETF from an Investment Trust, real estate crowdfunding is a simple and affordable alternative that can make your money work harder for you. Just make sure you choose a reputable investment management platform which has a strong track record of generating long-term returns.
Investing is a long-term game. You don’t need to make risky trades or gamble with your life to generate decent returns. The best path towards establishing long-term gains is to build a highly diversified portfolio and ignore short-term price movements and volatility.
So what type of investor are you?
Okay, now that we’ve debunked a few myths, let’s move on and discuss the different types of investing that are available today.
Broadly speaking, there are two types of investors: the risk seekers and the risk averse.
Which one might you be?
Well, that depends on how much investment risk you are prepared to tolerate
In industry terms, this is usually referred to as your ‘risk appetite’.
If you’re risk-seeking, you’re prepared to take on much more risk to try and earn market-beating returns. You’ll often buy and sell frequently to benefit from short-term price movements, although this is not easy!
If you’re risk-averse, you want to avoid market volatility and keep risks to a bare minimum. You’re much more concerned about not losing money during a market downturn, and you want easy access to your money. With the recent market downturn, you may feel uneasy about putting any cash into stocks and shares, even though the value of cash is diminishing because of high inflation.
Here's a quick test to determine your investment risk appetite:
Imagine that the markets have had a very bad day. The FTSE, S&P, Nasdaq etc., have all plummeted. The value of your investments has gone down by a few %.
What is your instinct?
If so, you may be more risk-averse and prefer to keep more of your investments in low-risk assets such as bonds and cash.
Then you may tolerate taking on a little more risk and investing in a higher percentage of stocks and shares.
If so, you’re better off sticking with lower-risk assets, as these are less exposed to the ups and downs of the market.
Then you may want to consider taking on more risk. According to a Barclays Gilt study, stocks and shares have outperformed cash 9 out of 10 times in every 10-year period since 1898.
Let’s look at another comparison – passive versus active investing
Passive investing, which is similar to the risk-averse approach, is a strategy based on maximising your investment returns by doing as little buying and selling as possible. The best-known form of passive investing is index investing, where you follow a benchmark such as the FTSE 100 or the S&P 500.
With passive investing, you’ll do very little, if any, trading, between buying and selling your assets. Your investments can be managed by an expert team who will adjust your portfolio based on how the market is performing.
These types of investments generally have lower fees and may produce better returns in the short-to-medium timeframe (5 years or less), due to less exposure to market volatility.
In the long term (5 years+), passive investments generally underperform their active counterparts, as they rarely beat the market.
In contrast to passive investing, active investing is when you try to outperform the market by selecting the most 'attractive' investments. Active investors are risk-seekers and are eager to profit from short-term price changes. However, this can only be done successfully if you have the expertise and the time to do the technical analysis required.
While there is the potential to make big returns, even the most talented and experienced investors can sometimes incur big losses with the active approach.
High-net-worth individuals may choose hedge funds to manage their portfolios on their behalf.
Hedge funds are managed by highly experienced fund managers who employ various strategies to achieve market-beating returns, taking very high risks such as buying with borrowed money.
How do private equity funds work?
Private equity funds are run by private equity firms that buy and manage private or public companies before they sell them. They will overhaul these companies to try and generate a profit once the business has been sold. Private equity investors generally need to have at least $250,000 to invest, so obviously, it’s only an option for higher net-worth investors.
What are the main opportunities of investing in private equity funds?
Because of the very high minimum threshold, over time, private equity funds can generate large returns even if the overall percentage returns are small.
What are the main risks of investing in private equity funds?
If there is a market downturn and/or the companies you invest in fail, you could lose a lot of money. Unlike investments in shares or ETFs, which can be sold at short notice, private equity investments are not as flexible. Typically, you will need to keep your funds with the private equity firm for at least four years.
How does short-term renting work?
If you're a homeowner, you can rent out your home or one or more of its rooms to tenants. Many property owners advertise their properties on third-party websites such as Airbnb or hire letting agents to advertise the property/rooms on their behalf.
What are the main opportunities of short-term renting for investors?
The easiest way to calculate your rental returns is to divide the property's annual rent by its value, and then multiply that by 100. For example, a property valued at $500,000 with an annual rental income of $20,000 would give you a modest rental yield of 4%.
What are the main risks investors need to consider when short-term renting?
As you would expect, the real estate market is vulnerable to economic downturns. During a recession, wages often stagnate or rise less than inflation, reducing people's purchasing power and forcing banks to tighten their lending criteria.
Short-term renting is usually for vacations or business trips rather than living. Therefore, if corporate earnings and people's wages fall, there is less money available for these activities, which can increase the risk of vacancies.
There are also legal constraints you may need to bear in mind. For example, in London, Airbnb hosts are banned from renting their property for longer than 90 days a year. If a property is rented out for longer than 90 days via this platform, the rental is counted as mid-term, and the owner could face penalties such as a fine.
General letting rules vary between jurisdictions and may change if new regulations are introduced or existing regulations are relaxed.
How do they work?
When you invest your money in stocks, you're buying a tiny piece of a company. If the company performs well, the stock price increases and the value of your investment grows. You should always consider the risk-return tradeoff: the higher the risk, the higher the potential for profits and losses. Less risks means less potential for rewards or losses. You can invest in stocks independently (the DIY approach) by picking your own shares or funds, or an investment management company can pick a portfolio for you based on your risk tolerance. Higher risk investments, such as leveraged ETFs, tend to generate better long-term returns, although you can reduce your risks by creating a globally diversified portfolio and investing in multiple sectors such as high technology, education and transport.
When you invest in a bond, you’re loaning your money to a government or a corporation that needs to raise more capital, often for a fixed period. Once the bond has matured (when the loan period has ended), you’ll get your original loan back. You also receive regular interest payments called coupons, which can be a reliable source of income, depending on how large your investment is. You may earn more or less money if you sell your bond before its maturity date.
What are the main benefits of investing in stocks or bonds?
Bonds are generally lower risk because they are a form of fixed income. That means the original sum of money you've invested - otherwise known as the principal - is guaranteed to be paid back when the bond matures, which could be anywhere from 1-30 years, depending on whether you invest in a short-term, medium-term or long-term bond). If inflation falls, the value of any fixed interest payment goes up in real terms.
However, stocks generally offer better returns than bonds over long time periods (especially 10 years+). If the companies you've invested in perform particularly well, you could sell your investments at a much higher price than you bought them for.
What are the main risks of investing in stocks or bonds?
With bonds, if inflation rises sharply, the value of your fixed interest payments will fall in real terms. However, with stocks, if the companies you’re investing in do badly, the value of your investments will also fall and you may end up losing money.
With bonds, you should check who the issuer is and the Capital Guarantee, which obliges the issuer to absorb any losses you incur (in exchange for a management fee). You should also consider the bond's rating: a higher score means the interest rate will be lower, while 'junk' bonds (high-yield bonds) have lower credit ratings but pay higher interest rates.
Stocks are also highly susceptible to the performance of the macroeconomic environment. For example, recessions, new tax laws or new regulations could affect the value of the companies you're investing in. Furthermore, when overall confidence in the market is low, the stock market is unlikely to perform as well.
Crowdfunding is the practice of bringing together multiple investors and pooling their investments in order to fund larger investments or projects.
Real Estate Crowdfunding allows finance to be collectively raised from several investors to fund the purchase or construction of a property. Each investor owns a percentage share of the property depending on the amount invested.
Firstly, the fundamentals never change: everyone needs somewhere to live, and renting is the only option for people who have yet to save enough money for a mortgage deposit or are renting their mortgaged property. The demand for long-term renting, unlike short-term renting, will always remain high.
Secondly, you don’t need hundreds of thousands of $s to invest in property. You can invest with significantly smaller sums of money by buying a smaller share of each asset. For example, with Bricksave, you can start your global property portfolio with the equivalent of just $1000.
We’ve explained the benefits of real estate crowdfunding in this blog here, but here’s a summary of why it may be a better alternative to traditional property investing:
Real estate crowdfunding can be one of the fastest ways to start earning a return from your investments. For example, when properties are forward-purchased and already have tenants, you may receive rental returns within a month (although this is not guaranteed).
As we mentioned earlier, you don't need to have enormous sums of cash to start investing in real estate. In fact, it can even be a good opportunity to earn money from property before you’ve saved up enough money for a mortgage deposit.
It's easier to diversify to reduce your risks
Spread your capital across different regions, properties and asset classes, to reduce your vulnerability to downturns in a specific region or area of the market.
What are the main risks of real estate crowdfunding?
The value of your investments may go down if there is a market downturn. Selling a property can also take time, so this may not necessarily be the best option if you may need to liquidate your investment (withdraw it into cash) at short notice.
Traditionally, real estate crowdfunding was limited to domestic markets, restricting your ability to diversify your portfolio and reduce your exposure to domestic volatility.
Fortunately, Bricksave, an affordable alternative investment option, alleviates this risk by enabling you to build a diversified portfolio consisting of real estate from all of the world – from Barcelona to Miami. But even when the market is performing poorly, you can continue to earn rental returns until it is an appropriate time to sell, because people always need places to live.
In a previous blog here, we discussed four strategies for investing in real estate. Here’s a quick recap:
1 - If you have the money, you could just buy a property
This may not sound like a 'strategy', but it's the simplest way to invest in a property. You buy it outright so the asset is yours. But did you know that this is the most expensive way to invest in property in 2022?
2 - You could buy a home and rent it to a couple or a family
This can be a reliable income source for retirement, saving for children, or anything else. One of the big advantages of buy-to-let is that you can hire a letting agent to manage your property on your behalf (in exchange for % of your rental income).
3 - Invest in houses for multiple occupations
These are properties which accommodate unrelated tenants such as professionals or students and are common near universities. HMOs have stricter planning requirements and legislation than buy-to-lets, and fewer letting agents are willing to manage these types of rentals compared to buy-to-lets. It is also harder to get a mortgage for an HMO, and you may need a larger deposit.
4 - Real estate crowdfunding
This is the easiest, simplest, and most accessible route to investing in property - especially if you don't have an investment background. By investing in real estate crowdfunding, you can be assured that the properties will have been picked after a thorough analysis. This will include legal and technical issues, national and local market conditions, and macroeconomic variables. Real estate crowdfunding opportunities can offer greater profit potential with lower exposure to risk and, assuming the crowdfunding platform is reputable, with all of the heavy lifting done for you.
Contact us today to learn more about how to get started with real estate investing.
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