What are you trying to achieve with your investments?
There are different types of risk involved with investing, so it’s important to find out what they are and think about how much risk you’re willing to take. It all depends on your attitude to risk (how much risk you are prepared to take) and what you are trying to achieve with your investments.
Things to think about before investing
How much can you afford to invest?
How long can you afford to be without the money you’ve invested (most investment products should be held for at least five years)?
What do you want your investment to provide, capital growth (your original investment to increase), income or both?
How much risk and what sort of risk are you prepared to take?
Do you want to share costs and risks with other investors (using a pooled investment, for example)?
If you decide to invest using pooled investments, consider which type would be most suitable for you. The main differences between pooled investments are the way they pay tax and the risks they involve (especially investment trusts and with-profit funds).
What are the tax benefit implications and what tax will you pay and can you reduce it?
You may be looking for an investment to provide money for a specific purpose in the future. Alternatively, you might want an investment to provide extra income. So having decided that you are in a position to invest, the next thing to think about is: “What am I investing for?” Your answer will help you to choose the most suitable type of investment for you. If you have a particular goal you will need to think about how much you can afford and how long it might take you to achieve your goal.
You may have a lump sum to invest which you would like to see grow, or from which you wish to draw an income. Equally, you may decide to invest in instalments, (for example, on a monthly basis) with a view to building up a lump sum.
Your investment goals should determine your investment plan and the time question: – “How long have I got before I need to spend the money?” – is crucial.
Generally, the longer it is before you need your money, the greater the amount of risk you are able to take in the expectation of greater reward. The value of shares goes up and down in the short term, and this can be very difficult to predict, but long term they can be expected to deliver better returns. The same is true to a lesser extent of bonds. Only cash offers certainty in the short term.
Broadly speaking, you can invest in shares for the long term, fixed interest securities for the medium term and cash for the short term.
As the length of time you have shortens, you can change your total risk by adjusting the “asset mix” of your investments, for example by gradually moving from share investments into bonds and cash. It is often possible to choose an option to “lifestyle” your investments, which is where your mix of assets is risk-adjusted to reflect your age and the time you have before you want to spend your money.
Income can be in the form of interest or share dividends. If you take and spend this income, your investments will grow more slowly than if you let it build up by reinvesting it. By not taking income you will earn interest on interest and the reinvested dividends should increase the size of your investment, which may then generate further growth. This is called “compounding.”
