Deciding where and how to invest your hard-earned money can be difficult. Investments vary widely in terms of how the money is invested, what the fund or investment portfolio aims to achieve and the level of risk it carries. What is important, is that any investment aligns to your personal circumstances.
Before starting to research individual investments, there are five key questions to first consider in order to establish what investments are going to suit you.
Key questions to ask yourself:
- Objective – what do you want to achieve – including how much you need your investment to grow by and the time period you want to achieve your goal by?
- Risk tolerance – what is your attitude to risk when it comes to investing. If your investment falls in value, will it cause you sleepless nights?
- Ability to withstand loss – how much can you afford to lose?
- Ethical considerations – do you want to take any moral stance on how you invest money?
- Experience – how experienced are you in financial markets?
Examples of these considerations in practice, based on your circumstance.
Your objective, risk tolerance and ability to withstand loss are very important considerations and are normally dictated by your circumstances and your stage of life.
For example, if you are 30 years old and you’re saving for retirement, then your objective will be to create a sizeable pension pot and therefore your priority will most likely be the growth rate of your investment.
An investment providing a 7% average return over a 35-year period, will provide almost double the return of a 5% growth rate due to the power of compound returns. Due to having a substantial amount of time before you retire, your risk tolerance and your ability to withstand loss is likely to be higher, as you may be much less worried about fluctuations in investment values. In this instance if the approach you take is too cautious you may not achieve the growth you were looking for from your investment. However, as time is on your side you can probably afford to take a slightly riskier investment strategy to achieve the return you are looking for.
If on the other hand you are 65 years old and about to retire, your risk tolerance will be lower. Your pension may be your main source of income to live off during retirement or a supplementary source of income. Even if it’s just there to enable you to enjoy a few of life’s luxuries, your ability to withstand loss will be much lower as the income cannot be risked to any great extent. However, at the same time you may still have 30 years plus to live so it still needs to be invested appropriately to protect against the ravages of inflation.
In this situation it is likely that a strategy using a greater balance of investments would be more suitable, for example an investment with a larger proportion of bonds and a lower proportion of equities might be recommended to provide smoother returns.
Or you could be a highly successful business person aged 45, having already maximised your pension and ISA allowances and your risk tolerance and your ability to withstand loss would be higher. Your objective is to save money by looking for other investment options that also have tax efficiencies. After gaining a detailed understanding of the client’s objective, risk tolerance and ability to withstand loss an Independent Financial Planner may recommend an investment into Venture Capital Trusts due to the tax benefits (up front tax relief and tax-free dividends and gains) involved with these investments.
Ethical considerations
In days gone by, if you had your own personal stockbroker, you could express particular ethical concerns e.g. avoid investments in tobacco stocks or oil companies. Today, while you can still do that, the whole world of ethical and sustainable investing has evolved and become far more scientific.
Rather than avoid particular stocks or sectors, there are funds and strategies which only invest in companies and sectors which have positive ethical values or practices, for example sustainable energy or companies that provide living wages.
Experience
How much previous experience you have in investing is likely to impact the level of complexity you are comfortable with when it comes to your investments. If you are a first-time investor, you may prefer a really simple investment solution that ticks all your boxes. If you are more experienced, you are likely to have a better understanding of the market and hence be more open to more complex investments.
However while you may feel as though you could make some investment decisions, would you know what to do if the market rose or fell 20% in a few days or if a world event hit the news. It only takes a moment to think about all the recent issues, Covid, Russia’s attack on Ukraine and interest rate hikes to realise that you will sometimes need guidance and resilience to know when to take action and when it’s best to do nothing at all.
How we can help
You may want someone qualified to help you fully explore the above questions or to undertake the research into the different investments for you.
Whatever stage you are at with your investments and however experienced you are, our Independent Financial Advisors offer advice tailored to your situation and needs.
Our expert planners are here to:
- Understand situation and goals
- Communicate a clear plan to help you invest well and avoid mistakes
- Implement the plan for you
- Provide ongoing advice and support
Find out more
Contact our team of expert and friendly planners to book a free initial consultation by calling 0330 441 2244, complete our enquiry form or email [email protected]