What assets should I be invested in?

Where should I put my money

I've saved some money and it's currently sat in a bank account. Where the hell do I put it? The answer to this question is complex and isn't straightforward. To help us to answer your question you must consider the following: liquidity, risk and return.

But firstly let's briefly cover your options:

1) bank - keep the money where it is. Maybe you can try to find a bank or savings account that pays a better rate of interest. You could wrap up the money as an ISA to protect the returns from being taxed

2) bonds and fixed income - you agree to lock your money up for a period of time in return for a fixed interest payment(s) and your capital back at the end of the period

3) stocks and shares, equity and funds -investing in Companies or funds of companies in order to gain a share of those Company profits in the form of dividends and or capital growth earned upon the sale of the share(s)

4) property - purchase of investment properties or a property fund (also called a REIT) in order to earn a rental return paid from tenants or dividends from the REIT fund or capital gains from the sale of property or funds

5) crowdfunding - earning interest (or dividends of the platform allows for an equity stake) returns from lending to small businesses 

In practice, liquidity, risk and reward are all connected but for the proposes of understanding the considerations when deciding where to put your money we will assess them on an individual basis.

Liquidity 

You need to assess how quickly you will need access to the cash. Can you afford to tie away your money over a longer period? If so then you may want to look at bonds which can tie your money up anywhere between one year and 30 years. So if you know when you will need access to the funds then you could tie the money up for the period between now and then.

Or else you could invest in property. Property is highly illiquid. If you need access to the money quickly then you will likely have to sell your property first. This can take a few months in a period of property boom and even years during a slump in the property market. The added difficulty with property is that you will also need a fairly decent chunk of savings in order to put money into a deposit.

Interestingly crowdfunding and shares are reasonably liquid assets as you can sell them (albeit potentially at a loss) and obtain the cash within a few days.

Risk

Different types of assets pose different levels of risk. Bonds and cash are considered the safest options. The financial services compensation scheme currently covers any investment up to £75,000. So there is no risk of losing this amount. Furthermore, cash and bonds are considered low risk as it is highly unlikely for the capital value of the investment to be diminished.

Property is probably the next riskiest asset class. In theory your tenant could stop paying in which case there will be legal consequences as well as the lack of income coming in. Additionally, property prices can rise and fall based on external socio-economic reasons beyond your control. You may find that you would have to sell at a loss during a down period if you need access to the money immediately and couldn't afford to wait it out.

Finally, crowdfunding and shares are probably the most risky. The price of a Company can cycle up and down based also on socio-economic factors. The risk with shares is that the value of the shares can go to zero if the Companh goes bust. This is less likely with property,

Reward

Returns for cash will likely be the lowest as it is the asset with the least risk and is easy to get hold of. Returns are anywhere between 0% to 3%.

Bonds tend to have higher returns based on your willingness to tie up the money for a longer period. Returns are currently between 1.5% to 4.5%.

Crowdfunding in the form of issuing microloans can be risky in the sense that the Company you have lent to could go bust and as such returns can be anywhere between 5.5% to 15% depending on the risk involved.

Property is always thought to be fairly safe in the long run (safe as houses!). However there can be short term difficulties based on the demand and supply of rental properties. The gross rental return can be anywhere between 4% to 10%. However,the return is leveraged by taking on a mortgage. For example if you only put down a 25% deposit then you multiply the returns by four, hence 16% and 40%. Remember that these returns are before paying all costs related to owning property.

Finally, shares are highly volatile. Returns could be anything from 0% in dividends to 20% and beyond (although uncommon). Share values can fall to zero though or else they can double, triple.....ten-tupple...and beyond. In theory the returns are unlimited as long as the Company continues to grow.

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