Whatever stage of life you’ve reached and whatever plans you may have for the future, you want your money to earn the best return possible and make your money work a lot harder, without taking undue risk.
That’s why it’s important to invest in a way that’s right for you and in line with your attitude for risk that will meet your goals.
By setting aside some of your money now in investments that could appreciate over time, you’ll set yourself up for greater financial security in the future. Whether you want to build a pension for retirement, save a deposit for a house, help your children or grandchildren, or generate extra income to cover an expense, any savings you may have been able to accrue that are not required to finance your day-to-day living may provide a more substantial return if you invest them.
Take the time to think about what you actually want from your investments. The sooner you start investing the better off you will be. This is a simple truth, and it’s based on the fact that even the most conservative investments grow on a compound basis. Knowing yourself, your needs and goals, and your appetite to risk is a good start:
Goals – be clear about what your investing for;
Payments – Make sure you can afford the amount you want to save;
Investment Risk – Think about the level of risk that you are comfortable taking with your money;
Timescale – The longer you invest for, the more opportunity it has to grow in value and reach your goals;
What you’ll get back – will depend on three main factors: How much you pay in; how long you invest for; and how your investments perform.
Mix it up – spreading your money across different investment types and countries can reduce your risk;
Tax efficient – use tax efficient wrappers such as pensions, individual savings plans, enterprise investment schemes, venture capital trusts, etc;
Review, review, review – its vital to review your investments on a regular basis to ensure they stay on track to meet your goals.
If you’ve got a sufficient amount of money in your cash savings account – enough to cover you for at least six months – and you want to see your money grow over the long term, then you should consider investing some of it.
Investing is a lifelong process, and the sooner you start, the better off you may be in the long run.
RIGHT SAVINGS OR INVESTMENTS
The right savings or investments for you will depend on how happy you are taking risks and on your current finances and future goals. Investing is different from simply saving money, as both your potential returns and losses are greater.
If you’re retiring, for example, in the next one to two years, it might not be the right time to put all of your savings into a high-risk investment.
MORE CONSERVATIVE INVESTMENTS
You may be a few months away from putting down a deposit on your first home loan. In this case, you might be considering cash or term deposits. You might also choose a more conservative investment that keeps your savings safe in the short term.
On the other hand, if you have just recently started working and saving, you may be happy to invest a larger sum of your money into a higher risk with higher potential returns, knowing you won’t need to access it in the immediate future.
Defensive investments focus on generating regular income, as opposed to growing in value over time.
The two most common types of defensive investments are cash and fixed interest.
DIFFERENT INVESTMENT OPTIONS
If appropriate, you should consider a range of different investment options. A diverse portfolio can help protect your wealth from market ups and downs. There are four main types of investments, each with their own benefits and risks.
- Cash – savings put in a bank or building society account
- Shares – investors buy a stake in a company
- Property – investors invest in a physical building, whether commercial or residential
- Fixed interest securities – investors loan their money to a company or government
The various assets owned by an investor are called a ‘portfolio’. You can invest directly in these assets, or you may prefer a managed fund that offers a range of different investments and is looked after by a professional fund manager.
Growth investments aim to increase in value over time, as well as potentially paying out income.
Because their prices can rise and fall significantly, growth investments may deliver higher returns than defensive investments. However, you also have a stronger chance of losing money.
The two most common types of growth investments are shares and property.
Returns are the profit you earn from your investments.
Depending on where you put your money, it could be paid in a number of different ways:
- Dividends (from shares)
- Rent (from properties)
- Interest (from cash deposits and fixed interest securities)
- The difference between the price you pay and the price you sell for – capital gains or losses
Your investment time frame will determine your risk profile to some extent, as this has a direct bearing on your capacity to take risk. Risk capacity is also influenced by factors such as your age, wealth, and the goals you are saving and investing for. Your capacity for risk is likely to change over the course of your life as your personal circumstances change.
If you understand the risks associated with investing and you know how much risk you are comfortable taking, you can make informed decisions and improve your chances of achieving your goals.
Risk is the possibility of losing some or all of your original investment. Often, higher risk investments offer the chance of greater returns, but there’s also more chance of losing money. Risk means different things to different people.
DIFFERENT TYPES OF INVESTMENT
None of us likes to take risks with our savings, but the reality is there’s no such thing as a ‘no-risk’ investment. You’re always taking on some risk when you invest, but the amount varies between different types of investment.
As a general rule, the more risk you’re prepared to take, the greater returns or losses you could stand to make.
Risk varies between the different types of investments. For example, funds that hold bonds tend to be less risky than those that hold shares, but there are always exceptions.
LOSING VALUE IN REAL TERMS
Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time. This is because the interest rate paid won’t always keep up with rising prices (inflation).
On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls, you could earn less in interest than you expected.
INFLATION AND INTEREST RATES OVER TIME
Stock market investments might beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell. This could result in a poor return or, if prices are lower than when you bought, losing money.
You can’t escape risk completely, but you can manage it by investing for the long term in a range of different things, which is called ‘diversification’. You can also look at paying money into your investments regularly, rather than all in one go. This can help smooth out the highs and lows and cut the risk of making big losses.
Your investments can go down in value, and you may not get back what you invested. Investing in the stock market is normally through shares (equities), either directly or via a fund. The stock market will fluctuate in value every day, sometimes by large amounts. You could lose some or all of your money depending on the company or companies you have bought. Other assets such as property and bonds can also fall in value.
The purchasing power of your savings declines. Even if your investment increases in value, you may not be making money in ‘real’ terms if the things that you want to buy with the money have increased in price faster than your investment.
Cash deposits with low returns may expose you to inflation risk.
When you start investing, or even if you are a sophisticated investor, one of the most important tools available is diversification. Whether the market is bullish or bearish, maintaining a diversified portfolio is essential to any long-term investment strategy.
Diversification allows an investor to spread risk between different kinds of investments (called ‘asset classes’) to potentially improve investment returns. This helps reduce the risk of the overall investments (referred to as a ‘portfolio’) under-performing or losing money.
With some careful investment planning and an understanding of how various asset classes work together, a properly diversified portfolio provides investors with an effective tool for reducing risk and volatility without necessarily giving up returns.
Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS). The FSCS savings protection. limit is £85,000 (or £170,000 for joint accounts) per authorised firm.
If you have a lot of cash – more than six months’ worth of living expenses – you might consider putting some of that excess into investments like shares and fixed interest securities, especially if you’re looking to invest your money for at least five years and are unlikely to require access to your capital during that time.
If you’re heavily invested in a single company’s shares – perhaps your employer – start looking for ways to add diversification.
DIFFERENT SECTORS OF THE ECONOMY
Diversification within each asset class is the key to a successful, balanced portfolio. You need to find assets that work well with each other. True diversification means having your money in as many different sectors of the economy as possible.
With shares, for example, you don’t want to invest exclusively in big established companies or small start-ups. You want a little bit of both (and something in between, too). Mostly, you don’t want to restrict your investments to related or correlated industries. An example might be car manufacturing and steel. The problem is that if one industry goes down, so will the other.
With bonds, you also don’t want to buy too much of the same thing. Instead, you’ll want to buy bonds with different maturity dates, interest rates and credit ratings.
DIVERSIFYING WITHIN AN ASSET CLASS
There are many opportunities for diversification, even within a single kind of investment.
For example, with shares, you could spread your investments between:
- Large and small companies
- The UK and overseas markets
- Different sectors (industrial, financial, oil, etc.)
Please contact us if you want help creating a diversified investment portfolio.
Whether it’s termed ethical, responsible or sustainable investing, the aim is generally the same. It’s investing your money in businesses which have some intention of making the world a better place. In the past, ethical investing was the only option if you wanted to invest in companies aligned to your values. But this ‘good money’ sector has moved on a lot in recent years.
SOCIETY AND THE ENVIRONMENT
Ethical is now just one of many options you can choose from. Green and ethical investments look at the wider impact of investing on society and the environment when seeking financial returns. They take into account social or environmental considerations in addition to financial criteria.
Just as you can now choose from a range of green or ethically produced goods in your local supermarket, you can also choose financial products that have positive benefits for the environment and society.
Green and ethical investments allow you to have a positive impact on the world around you. Green and ethical investments may promote greater corporate responsibility, invest in solutions to 21st century problems, or contribute to cleaner, greener profits.
VALUES-BASED INVESTMENT FUNDS ENABLE YOU TO MAKE POSITIVE FINANCIAL DECISIONS THAT SUPPORT YOUR VALUES AND MORALS
Ethical – tends to follow a moral-based screening process that excludes industries such as tobacco, gambling and armaments, while seeking companies that contribute positively to the environment and society.
SRI – sustainable and responsible investment seeks to invest in the most sustainable companies, i.e. those that manage their environmental, social and community impacts for the greater good of society.
Impact – invests in companies that aim to achieve a measurable positive social or environmental impact in addition to a financial return.
Green – invests in companies involved in improving the environment.
Shariah – derives its principles from Shariah Islamic law. To comply with Shariah, investment is not allowed to earn interest.
If you would like advice or guidance on building an ethical savings or investment strategy, then get in touch.
For Wealth Management, Savings & Investment Planning Advice, please call Tony on:
Mobile: 07585 592494