Where should you invest in 2014?
New Year's resolutions are typically abandoned very quickly, with promises to sort out finances or start contributing to a pension quickly re-prioritised due to January's higher than normal credit card bills. Investors who did follow through in January 2013, though, will have been celebrating over Christmas, as the equity markets delivered some spectacular returns.
The Japanese market led the way - up 51% from the start of the year to 1 December - followed by the US market, which was up more than 26%, buoyed by their central bank doing everything it could to assist the US economy. Europe and the UK were also positive in what was a great year for almost all markets, with the notable exception of those known as the Bric countries (Brazil, Russia, India and China), which disappointed.
If you weren't lucky enough to benefit from 2013's rising markets, the temptation might be to convince yourself you've missed the boat – but the reality is over the long term the best place to generate positive returns is the equity market, and most people simply don't take enough risk with their investments when they're young enough to benefit from time and compound interest.
The other significant benefit to stepping on to the investment ladder is the forthcoming flat-rate state pension, which makes all investment worth it. Previously, some savers would have been just as well off if they hadn't saved, due to means-testing. However, the move to a flat-rate pension means that all your savings should count towards a better financial future.
Although the prospects for equity markets in 2014 are uncertain, you do have central banks on both sides of the pond determined to lower unemployment and support growth – a good start.
You also have the possibility of a recovery in developing countries that have underperformed this year, albeit after some very good returns in previous years. On the down side, the gradual withdrawal of quantitative easing and the possibility of rising interest rates will mean certain sectors, including financial stocks, come under increasing pressure. But whether you're topping up existing investments or starting out, there are a few golden rules to bear in mind and these include: invest regularly; diversify; be tax-efficient; and take a long-term view.
Rather than investing a lump sum, it often makes sense to smoothe the peaks and troughs of investing by drip-feeding money into the markets. Known as pound-cost averaging, regular investing reduces risk overall. Most brokers offer a regular investment service, often for considerably less than the cost of normal trading, as they aggregate all the deals together. Removing some of the volatility and risk and buying more units when share prices are lower is an attractive option.
Even when markets are increasing globally, the different level of return achieved from different geographic areas can be vast. Choosing to invest in a geographically diverse fund or, even better, a mix of different UK and global funds, gives you a better chance and also reduces some of the specific geographic risks involved. With thousands of funds to choose from, it can be difficult to know where to start - but Moneywise certainly helps.
Isas and pensions
Using an Isa or pension is a must. The range of investment options and the ability to invest regularly are both available with tax-efficient accounts and in many cases there is no additional cost to investing in an Isa. The long-term benefits of an Isa can't be overstated, so make this an essential part of your overall strategy.
Taking a long-term view may appear simple but it does come with conditions. The first is you don't make your investment decisions by watching the 10 o'clock news and deciding to withdraw your money if the market becomes more volatile. The second is you don't take the opposite approach and simply ignore your investments altogether. Whatever your level of interest in the market, you need to dedicate some time to reviewing your investments at least on a semi-regular basis. You might find you actually enjoy it.
If you're wavering on whether to start investing or not, hopefully you'll realise it definitely does pay to invest and you'll be the one celebrating next Christmas.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.