Grow your investable assets

If you’re looking to improve your debt ratio, there are two sides of the equation that you can adjust. The first is to reduce the level of debt you have. This could be done by paying down high interest debt such as credit cards (which should be your first option) or by keeping your mortgage and lifestyle borrowing to the minimum level possible.

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The second is my increasing your level of investable assets. This way, even if your debt was to stay the same, the ratio between it and your assets would be improving.

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When starting to invest, there are a few key concepts to keep in mind. Namely, the impact of inflation, the risk vs return relationship and diversification.

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Inflation

You want your assets to grow above inflation. That’s because inflation increases the cost of everything around us from groceries to cars to houses to holidays. If you aren’t growing your assets at least in line with the rate of inflation, you’re able to buy less with your money each year, which means you’re losing purchasing power.

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This is known as ‘real terms’. If you have £100 and the cost of a can of Coke goes from £1 to £1.10 due to inflation, next year your £100 will only buy you 90 cans of coke instead of 100. You still have £100, but in real terms the value of that £100 has gone down because it has lost purchasing power.

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In order to combat this problem, you need to invest.

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Risk vs Return

But investing isn’t a one size fits all proposition. There’s a huge number of different investments to choose from, all across the risk spectrum.

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In order to achieve higher returns than what you’d receive in a bank account, you need to take some risk with your money. If you invest the right way, or take advice from Rosecut, risk doesn’t mean you’re likely to permanently lose money, but it does mean it will fluctuate up and down with the markets.

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That’s not to say you can’t lose money by investing. You definitely can, but this comes from making poor decisions when setting up your portfolio, rather than the way the investment markets work.

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The way to avoid real risk is through sufficient diversification.

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Diversification

One of the most important rules of investing is that you have to be diversified. This means not just investing into a single stock or a single property, but instead spreading your money across a range of different asset types and investments.

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This is really important for a few reasons. Firstly, it reduces your overall risk. If you invest in just 1 company, you could find that they struggle to grow or they could even go bankrupt. If that was to happen, you run the risk of losing all of your investment.

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Instead, if you are invested in 100 stocks, or 1,000 or even more, there is no risk to your overall portfolio if some of those companies don’t do so well.

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As well as reducing risk, diversification can also help you achieve better returns in the long term too. One of the important factors for diversification is making sure you have investments that don’t always move in sync.‎

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If you follow these investing rules you will put yourself in a great position to grow your investable assets over the long term and improve your debt ratio.