Five investment tips to get you started...
Set yourself a time frame and financial goals before you invest.
Through investment, you have a much greater potential for growth than by leaving your money in a savings account.
In the current economic climate, with interest rates so low and inflation rising, you could be losing out by keeping your money in a savings account because inflation is beating the return on interest rates and, therefore, the real spending power of your money is less.
Investment can enable you to match or even beat inflation and help you reach your long term financial goals, but it’s important to understand that, in order to do this, you are introducing the risk of loss to your money.
When you invest, you encounter what is known as a risk/return pay off. Traditionally, the greater the risk you take with your money, the greater the potential for growth.
But, with this, comes an increased chance of losing your money. Before even considering investing your money, you need to be fully comfortable with introducing the potential for loss.
No investment is risk free and if you simply can’t reconcile that there are no guarantees with investment and that you could, potentially, lose some of your money, you are not ready to become an investor.
When making financial decisions, it’s important to consider the five steps below before you do anything with your money.
1. What are your financial goals?
Set a clear goal of what you want to achieve by investing. Are you just looking to grow your money? Are you looking to provide an income? Is there a set amount that you want your money to grow by or a minimum income that you need to be provided by your investments?
Having an idea of these will help you to decide how much risk you need to take to reach your goals. You may not have a particular reason to invest or it might be open ended, but try to ascertain exactly what you want your money to do.
2. What’s your time frame?
Once you know what your goals are, work out how long you need to achieve them. This will give you a clear idea of the kind of rates of return that you’ll need from your investments and whether or not your goals are realistic.
Factors like your age and health are important to consider. If you have short-term goals (less than five years) you should stick to cash savings. A Best Rate cash ISA is perfect for this but don’t invest – if your investment falls you might not have time to recover your losses before you need the money. Check out how to find the best cash ISA, Medium (five to 10 years) and long-term goals (10 years or more) are appropriate for investment, but some investments become less appropriate the older you get. You have less time for your money to recover if it falls in value and, if you’re retired, your capacity to earn is diminished.
3. Understand your attitude to risk
Understanding the risks you’ll encounter through investment and how much risk you think you’re willing to take could have an impact on the length of time you want to invest and, indeed, your financial goals.
If you want your money to grow significantly over a shorter time period, you may have to invest in riskier assets to achieve that growth – but if the potential downsides are too much, you may have to realign your goals. Read our guide to understanding investment risk to learn more about your attitude to risk.
4. How much can you afford to invest?
Be realistic about how much you can afford to invest. Assess all of your liabilities, like debts, insurance premiums, pension contributions, savings and living costs, to see how much spare cash you have to invest. Remember that investment is long term and you should avoid having to access the money you’re investing, as it may not reach its full potential if you do.
5. Seek financial advice
Only those who have knowledge of the markets and strong financial sense should really be managing their investments on their own.
By seeking financial advice, you’ll be able to talk through all the points raised above and ensure that your investments are tailored exactly to your needs. Read our guide to choosing a financial adviser for the best ways to get investment advice.