Make your money work harder and achieve financial goals.
Whether you have a little or a lot of money to invest, make sure you understand your options.
Investing need not be confusing and risky, you just need the right strategy.
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- Whether you have a little left over money each month, or have just inherited a sum that you would like to put away for the future, chances are you will be looking for a way for that money to grow. Maybe you plan to put funds away regularly, or perhaps just in one lump sum?
- To achieve your goals you may need to consider contributing funds to both regular saving schemes and longer term investments.
With all investments you need to consider your attitude to risk, what you want to achieve and the timescale you have allowed in which to reach this goal.
For example, if you want to invest for a short period (5 years or less) for a special holiday or similar, you’ll probably want a low-risk strategy to ensure that growth will be achieved within this time. A savings plan with a good rate of interest with easy access would be a suitable vehicle for your investment. For medium term investments (5 to 10 years) you may prefer to spread risk across more than one investment type such as saving into a cash deposit as well as in some stocks and shares. For long term objectives (over 10 years), such as retirement, you may decide that you can afford to take greater risk to achieve potentially greater returns and so your funds could do well in a stocks and shares scheme.
Spreading the risk
If there is a danger that you could lose your money in an investment, then why bother? Surely it makes much more sense to put money into a cash deposit account where it is secure? Not necessarily... After tax on savings and the effects of inflation are considered, there is a chance that our cash savings lose us money. But wait, that doesn’t mean we should put all our money into the stock market either. Distributing cash across different types of investment is known as 'diversification' and helps reduce the risk and increase the chances of your money performing well for you.
Types of investment
If you are after a short term, low risk investment where you can have relatively easy access to your money, then consider a bank, building society or a Cash ISA scheme. Here your funds are secure, although they offer lower returns than alternative investments.
Investing in shares or equities, means you are investing in the stock market. If you invest in shares you need to be prepared for the fact that the value of your investment may vary wildly over the period it is invested. If you are able to leave the funds for a significant length of time, in most cases, funds invested in shares will significantly outperform those invested in cash.
You may already have an investment in the form of your own home? In addition, you may decide to invest in a second home as a buy-to-let investor or join a fund with a property portfolio which may consist of property on an international basis. The property market should be considered as a higher risk strategy as property prices can fall and rise and selling off your asset can take time. A financial adviser will be able to help you if you are considering investing in property.
Bonds & Gilts
When you invest in a Corporate Bond or Government Gilt you are lending large companies or the government your money in return for a fixed rate of interest on your return. Corporate bonds carry some risk as you are investing on the success of the company, but have the potential for a higher rate of return than state backed gilts, which are generally guaranteed.
Many people choose to invest in funds as opposed to individual shares as per diversification mentioned earlier. Effectively putting all of your eggs (shares) in one basket (company) is much riskier than dividing your interest into many baskets (companies). With an investment fund, you pool your money with other investors for a stake in an investment portfolio. You will pay a percentage to a fund manager, who looks after your investment and buys and sells stocks on your behalf. You can decide with your fund manager your objectives and the level of risk you are willing to take.
Two of the most popular types of funds are open-ended trusts and open-ended investment companies (OEICs).
Unit Trusts and OEICs
In a unit trust a fund manager will purchase bonds or shares in companies on the stock market on your behalf. The fund is split into units and these are what are purchased. The units are open-ended as the fund manager can create new units and cancel units to an unlimited degree. Units are valued in accordance to the net asset value (NAV) of the funds overall investments, so the value of the unit affects the total value of the investment. OEICs run in a similar way, but are operated by a company who create and cancel shares rather than units. Returns may be paid monthly, quarterly or twice yearly depending on the fund. You can choose to be paid your return on either an income or accumulation (reinvest into fund) basis.
Is investing for me?
Before you jump in and start investing money, it is worthwhile considering whether it is the best route for you. Remember that debt is likely to be more expensive than any return on investment you make, so repay debts first. Plus if your investment does not reach the goal you set, you won't risk defaulting on debt repayments and getting in financial strife. It's a good idea to keep back funds in the form of savings, or as previously mentioned, to make sure some of your fund is invested as cash into an easy access account. You never know what may be around the corner and tying all of your funds up in long term unattainable assets could cause problems should the unforeseen take place. As an added precaution, you might consider protecting your income, your mortgage and taking out life insurance so that if you become unwell or unable to work, your finances are covered if you cannot get access to the funds you have invested.
Speaking to a Financial Adviser is advised when it come to investment decisions. Our friendly experienced and qualified advisers will be happy to hear from you.