Investing your money wisely can be a challenging task when it comes to wealth management. And, as we start preparing for 2024, it will be no different.
As we all know, the financial landscape can be as unpredictable as the weather, with market conditions (and investment choices) constantly shifting.
To help you navigate this dynamic environment, we’ve summarised five of the most common investment choices.
Global ETFs: the Big Mac of investing?
Global Exchange-Traded Funds (ETFs) have been gaining popularity as a ‘best investment’ in recent years for good reason.
They are like the Big Mac of investing. Highly diversified, and beneficial when we see unbalanced market movements like those at the start of 2023, where 80% of S&P growth came from just a handful of mega cap US stocks.
Active managers may not have had these stocks in their portfolios and would have struggled massively and underperformed as a result.
Passive investments, on the other hand, largely give your portfolio exposure to thousands of listed stocks.
There is a wealth of evidence that supports the passive approach to investing. From 1926 through 2022, according to Ibbotson Associates, the compound annual rate of return of a diversified portfolio of large stocks (the S&P 500) was 10.3%.
Global EFTs can offer an additional layer of diversification with access to hundreds of asset classes. Whereas, unless you have a fund manager up there with LeBron James or Lionel Messi, active managers are unlikely to outperform the market.
Dividend Stocks: a reliable income?
Cash-heavy businesses tend to weather short-term volatility. This reliable income can be vital for investors.
Some firms may hold little excess cash and their valuation may thus be dependent on generating future profits. Such future revenue will be more heavily discounted in today’s environment of higher interest rates.
UK-listed companies, like Rio Tinto Anglo American, HSBC, and Vodafone, are well known for their ability to pay generous dividends. The impact of these dividends can be compounded through pound-cost-averaging by reinvesting over time in equal portions at regular intervals, limiting the risk of timing the market.
NASDAQ: riding the tech wave
The NASDAQ, a tech-heavy US index, has been the standout performer of 2023 so far, generating returns of 36% YTD in GBP.
The tech wave is being driven by advances in artificial intelligence (AI), kickstarted by the launch of Chat GPT in 2022. The sector was valued at $27 billion in 2019 but is now forecast to grow tenfold to $267 billion by 2027.
Nvidia has arguably been the poster child for AI, having seen its share price grow by 185% YTD.
While the market continues to assess how profoundly AI could affect our day-to-day lives, it is worth remembering that there was a similar buzz around the Metaverse a couple of years ago.
Short Term Bonds: a safe bet?
With long dated fixed income assets suffering large write downs as interest rates spiked, bond holders may wish to forget 2022. But the picture in 2023 wealth management is more nuanced.
The cost of borrowing has increased. And, while we commonly associate this with mortgages, it also applied to Government borrowing.
So, who does the Government borrow from? Typically, us!
In the UK, this borrowing is hovering around 4.6% while in the US, a 2-year treasury rate is currently just over 5% in the US. Given US debt is seen as the closest thing to ‘risk free’, this presents an attractive option in the short term.
UK investors are subject to income tax on interest earned from gilts, but completely exempt from CGT. This means you won’t have to pay any CGT on profits made if you sell a gilt, or it reaches maturity.
This is very useful for higher rate taxpayers who have used their ISA and Personal Savings Allowance, saving them 20% CGT.
Cash: a short-term safe haven?
Over the last 15 years, it has rarely felt that cash is King. This has quickly changed – to such a degree that NS&I had to withdraw their one-year bond paying 6.2% this month due to high demand.
With interest rates rising, a high yield savings account offers an attractive return without any of the normal volatility associated with investments, particularly over the last few years.
To be clear – cash is rarely the solution when considering long term investments. Despite the generous rates out there, no savings accounts are inflation beating.
So, while cash is low risk, it’s also a near certain way to lose the real value of your savings over the medium-long term.
The bottom line?
Investing your savings into a highly diversified portfolio with low fees will usually (dependent on your individual circumstances) be the best approach to meeting your financial goals. But ‘best investments’ are different for everyone depending on personal context. So, it is always best to speak to your financial planner before making any decisions.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.