You’ve got some cash set aside and you’d like to invest it. But it’s not easy to know how to start. Here, I’ll explain what the choices are, and how I’m choosing to invest my cash today.
What are the choices?
Traditionally, the four main asset classes for private investors are cash, bonds, the stock market and property. You might also see people suggesting alternative assets such as Bitcoin and gold.
I’m going to start by ruling out cash and bonds. Cash is useful for savings, but interest rates are so low today that it’s hard to stay ahead of inflation. Building real wealth with cash savings is now pretty much impossible.
Bitcoin is also out for me, because its value is purely based on how many people want to buy and sell it. It’s very hard to use and has no asset backing. I see it as a gamble, at best.
Gold is a reliable way to store value, but the gold price seems to be driven by sentiment as much as supply and demand. The other problem with gold is that it isn’t productive — it will never grow or pay a dividend. It’s not for me.
That leaves us with the stock market and property.
Should you buy to let?
A popular choice is buy-to-let property. But the reality is that high house prices have pushed down rental yields in many areas of the country. Costs are also rising — to start with, you’ll have to pay an extra 3% stamp duty on residential property that’s not your main home.
Mortgage tax relief is being cut. And then there are all the costs of being a landlord.
In my view, anyone buying a property to let is basically hoping that house prices will keep rising so they can generate a capital gain. But even if that does happen, you could still end up with a big capital gains tax bill.
I’m in stocks
By contrast, tax costs are very low for stock market investors. You can invest up to £20,000 per year in a Stocks and Shares ISA. Doing this means all future capital gains and dividend income will be tax free. Transaction costs are also very low. I pay dealing costs of about £10 when I buy shares, plus Stamp Duty of 0.5%.
Finally, the stock market makes it really easy to diversify your investments. For private investors, I think that’s important. We can’t be experts on everything. So it makes sense to spread the risk so that the impact of any problems is restricted.
What should you buy?
I believe the best approach is to keep it simple. I generally focus on large, well-established companies from the FTSE 100 and FTSE 250 indices. These companies are unlikely to go bust and are strong enough to recover from short-term problems.
By opting for stocks which pay dividends, I also get a useful cash income which I can withdraw or use to buy more shares.
Examples of shares I’ve bought over the last year include pharmaceutical giant GlaxoSmithKline, cruise ship operator Carnival and property group British Land.
These aren’t recommendations, but I think companies like these can be a good starting point for anyone wanting to build a successful long-term portfolio.
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Roland Head owns shares of British Land Co, Carnival, and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended British Land Co and Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.