Investing made simple

A voiceover talks over an animation running on screen. The animation, centred on the character Andy, compliments what is being said without adding any new information.

"At HL we want to help you make money. We can’t guarantee you’ll make millions, but we can give you everything you need to save and invest with confidence.

Let’s start with the basics.

This is Andy. He has cash set aside for a rainy day, but wants to make the rest of his money work harder for him. So, what options does he have?”

Cash

“Andy could keep all his cash in the bank, and get a small amount of interest.

The bank can afford to pay him interest because they lend his money out to businesses, who borrow because they think they can use the loan to expand their business, and make more money.

The banks are happy to lend the money because they are confident the business will do well.

But because there’s a risk the business could fail to repay the loan, the bank charges them a higher rate of interest to borrow the money, than they give Andy for saving his money. This is how a bank makes a profit.

So although it’s Andy’s money making this all possible, his savings aren’t working as hard for him as they could.”

Shares

“The good news is, Andy can get in on the action.

If he owned part of the business, he could benefit from its success. If a company chooses, it can divide its ownership into hundreds of thousands of pieces. And those pieces, known as stocks or shares, can be bought and sold by the public through the stock market.

When the business is doing well it can choose to share its profits with shareholders like Andy. This is called a dividend.

The value of Andy’s shares generally reflects how much the company is worth, so he also benefits from the company’s growth. Although, if the company performs poorly, the value of his shares could also fall. And if the company goes bust, he could lose all his money.”

Bonds

“Alternatively, instead of buying shares, Andy can cut out the bank and loan his money to the business directly. The company issues a bond, which is a promise to repay a loan, with a set interest rate, over a fixed period of time.

Andy doesn’t benefit from the company’s profits like when he owned shares but, as long as it can still repay its loan, he’s less affected if the business struggles. Although, if the business fails to repay the loan he could lose some or all of his money.”

Summary

“By investing in shares, Andy has the most opportunity to grow his money. But its value will go up and down more than in bonds or cash.

Putting all his money into a single company share is high risk, as Andy is completely dependent on its success.

A fund buys shares in lots of companies, so gives Andy a way to spread that risk. Andy benefits from the combined performance, so is less affected by individual company success or failure.”

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This video is not personal advice. All investments and income can fall as well as rise in value, so you could get back less than you invest. If you are unsure of the suitability of an investment or course of action for your circumstances, please seek advice. Past performance should not be seen as a guide to the future.

A voiceover talks over an animation running on screen. The animation compliments what is being said without adding any new information.

“‘Risk’ is one of the most frequently misunderstood terms among new investors. Let us show you what it really means and how you can use it to your advantage.

We know that when we say risk, you think ‘danger’. Crossing the road without looking, or getting in a cage with lions, are the actions of reckless people after all. But unlike these risks, investment risk comes with a potential reward.

If someone offers you £1 to climb onto the bottom rung of a ladder, you’d probably agree. You’d probably climb to the second rung for £2. But at some point, the risk of falling off outweighs the reward. And it’s where you feel comfortable in this balance between risk and reward that is your attitude to risk.

So how does this apply to you and your investment journey?

You can invest in any number of things. But when we talk about investing, we generally mean buying a small part of a company, a share.

If the company performs well, then you’ll make money. But if the company doesn’t do so well, you could have less than you started with when you come to sell it. This is investment risk.

Different types of companies will have different levels of risk and reward. Generally, the more risk you are prepared to take on, the better the potential returns. But just like with the ladder, you’re in control.

There are three ways you can adjust how much risk you take.”

1) Time

“The first is time.

Now, this is the big one. The longer you leave your money invested, the better chance you have of making money when you sell the investment.

But all investments, even the very best ones, go up and down in value over time. It’s why we say it’s important to invest for at least 5 years, as the odds get better the longer you’re in the market. Although, there is always a risk of getting back less than you invest.

The likelihood of you making money if you invest for just a day is around 50/50. But when investing for 10 years the probability increases to more than 98%. This is what’s happened historically, but things obviously change, so it might not happen in the future.”

2) Diversification

“However powerful time is, it’s much less likely to work if you have all your eggs in one basket.

So that leads us to diversification.

By this, we mean you shouldn’t invest in just one company – you need to have a mix. Different types of companies have different levels of risk and reward. For example, a small company just starting out, will have a tougher time than a large well-established business, but is more likely to experience significant growth.

A company selling products for which there is a steady demand might have smoother returns than one where demand depends on the health of the economy.

And equally some countries are steady and established while others are faster developing.

If you invest in a good mix of companies, you’re less affected by individual success or failures. A lot of people choose to do this by pooling their money with other investors in a fund, where the investment choices are made by an expert.

By doing this, it’s extremely unlikely you would ever risk losing all of your money, as the individual companies the fund manager bought would all need to fail for this to happen.”

3) Invest over time

“The third thing you can do is to spread your investments over time.

If you don’t have a large amount to invest all at once, this could also work to reduce your risk.

The company shares you’re about to buy could be more expensive or cheaper tomorrow, you’ll never know. Buying your shares in a series of smaller amounts over a period of time means sometimes they’ll be more expensive and sometimes they’ll be cheap. So you get an average cost over the period you’re buying. This helps protect you from investing all of your money on a really expensive day.”

Summary

“You’ll never have zero risk of losing some money. But investing in a good mix of companies, over a period of time, and then holding them for the long term dramatically reduces the risk of investing your money.

So you see, risk doesn’t have to equal danger. When properly understood, it can equal opportunity.”

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This video is not personal advice. All investments and income can fall as well as rise in value, so you could get back less than you invest. If you are unsure of the suitability of an investment or course of action for your circumstances, please seek advice. Past performance should not be seen as a guide to the future.”

A voiceover talks over an animation running on screen. The animation compliments what is being said without adding any new information.

“We all know that get-rich-quick schemes rarely end in a fortune. But the good news is you don’t need a secret formula or gimmicky investment tool to boost your savings.

All you need is time – the most powerful tool you have.

Let’s assume that starting today, you decide to save £150 a month. After 10 years you’ve saved £18,000, and you stop adding more money, but leave the rest invested.

Now, let’s say you told a friend at the start and tried to get them to do the same. They had other priorities – a big holiday and a new kitchen – so decided saving could wait.

All in all, 15 years pass before they decide to take your advice and start saving £150 a month. They feel they can save for longer, so they carry on saving monthly for the next 25 years, putting away £45,000 in total. Two and a half times as much as you.

Over the long term, you might hope your investments would grow by 5% a year on average. This, of course, is not guaranteed, but for this example we’ll assume both you and your friend enjoyed these returns.

Forty years have now passed since you first started saving. Who do you think is better off?

The obvious answer is your friend – they’ve saved much more. But the incredible power of compounding means that’s not the case.

You have £100,480. This cost you £18,000, which means your investments have grown by £82,480.

Whereas your friend has £88,218, but it cost them £45,000. So their investments have only grown by £43,218.

They have £12,262 less than you, despite saving £27,000 more. So by waiting 15 years, they are £39,262 worse off than you. Despite saving for longer.

Remember that this is just an example, not a projection.

So the best time to have started saving is 10 years ago, but the next best time is today. You can start regular savings with as little as £25 a month.”

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Disclaimer: This video is not personal advice. Investments can fall and rise in value, so you could get back less than you put in. The figures shown in this video are not guaranteed and do not take into account inflation or charges. If you are unsure how to proceed please seek advice.