Investing some of your money could help you reach your goals and help towards building your long-term financial security.
There are a few things to consider but, I hope you’ll agree, they’re all pretty logical.
Have Enough Cash
First things first, make sure you’ve got enough dosh to hand in the bank.
Saving is a way of holding short-term money until you need it. Investing is about putting your money to work for the long-term by taking calculated risks to try to make it grow.
The types of things you might hold short-term cash for could be:
An emergency fund to cover unexpected costs (like a new roof or the boiler breaking).
If you plan to change the car or go on an extravagant holiday, say, within the next 5 years.
Any other big expenses you think are going to appear on the horizon.
Make sure you’ve got enough cash for all this. It’s important stuff and will help you feel secure. If there’s anything over, that’s what you could think about investing.
Think of investing in the same way as buying a home. In the short term, the value of the property could fall, and you could lose money by selling before the housing market has a chance to recover.
However, if you plan to stay put for many years, you hope the property will go up in value by the time you’re ready to sell.
Likewise, plan to invest for as long as possible, ideally at least 5 years. This way, you’ll give your money the chance to recover from any dips in the market and give it a better chance to grow.
That said, there are no guarantees as the value of investments can go down as well as up.
Get The Facts About Investing
When you understand the facts about investing, you may feel more comfortable getting started. Here’s a few basics:
You don’t need to be rich to invest! Most investments can be set up with relatively modest sums, either monthly or lump sums.
You can withdraw some or all your investment at any time, and the money will be in your bank account within a few days (but you should be thinking a minimum of least 5 years).
Investing always comes with a degree of risk. The more risk, the more your money could grow over time but also the more you could lose.
Spreading your money over lots of different things (stocks & shares, bonds, property, etc) can help to reduce the amount of risk. That’s called diversification.
Watch out for costs. There are costs involved when you invest and they can vary MASSIVELY. Understand what these costs are and try to keep them as low as possible.
Decide How Much Risk You’re Comfortable With
There’ll always be some risk with investing, and you may not get back what you invest. Before you invest, you need to decide the level of risk you feel comfortable with.
Most investments are set up for people with different appetites for risk so it’s not too hard to find one that’s right for you. Remember, the higher the risk, the greater the potential reward (and a potentially bumpier ride).
Market volatility doesn't always affect the long-term growth of your investment. So, look towards the future and focus on your long-term goals when markets are rough.
Stay invested if you can because it’s tempting to sell to avoid further loss when there’s uncertainty. But remember, the loss only becomes real if you sell your investment.
The money you’ve kept in cash should mean that you can ‘afford’ to take some risk which can help to soften the blow when markets temporarily go south.
Keep Calm
When investing, our emotions and circumstances can influence our behaviour and decision-making.
For example, if the market suddenly drops, it can make you feel nervous. After all, it’s natural to want to keep your hard-earned money.
At this point, you might want to sell all your investment at once to take back control. But this is when you should make a smart investment decision instead of acting on impulse. These points might help:
Focus on your long-term goals: Think about your future goals and when you want to achieve these. Aim to invest for the long-term and keep focused on your investment plan.
Understand what you're investing in: Take time to understand what you're investing in before you commit so that you're aware of how your investment could perform over time.
Get more comfortable with the idea of risk: Understand your investment will go up and down. But, by having an emergency fund, you may not need to dip into your investment for anything unexpected.
Invest regularly: Try investing little and often instead of a lump sum. You'll average the price you buy, so you won't need to worry about finding the best time to invest.
Don’t react to market news: Seeing what's happening in the media can be scary, but it's normal for markets to have short-term reactions to global events.
Check your investments (but not too often!): Resist the temptation to check your portfolio on a daily or weekly basis. Aim to check it once a quarter and, if necessary, make changes based on your plan.
Get Familiar With Portfolios
A portfolio is a collection of funds that hold a mix of assets (such as shares, property, government bonds, and cash). If certain assets dip in value, others may increase, helping you spread your risk.
Lots of people decide to invest in portfolios as they don’t have to choose individual funds themselves. They're also managed for you by a team of investment specialists.
Portfolios spread your money across a wide range of investments so that if one or more goes down in value, it could potentially be balanced out by others gaining in value.
It’s the way most people invest their money, whether that be through ISAs, pensions, investment bonds or any other investment product.
Choose Your Investment Account (Product)
When you’re ready to invest, the main products you might choose to invest through would be a Stocks & Shares ISA, a General Investment Account or a pension.
A Stocks & Shares ISA is a tax-efficient way to build your portfolio. You can invest up to £20,000 each tax year without paying any UK income tax or capital gains tax on any income or growth.
A General Investment Account is a basic account with no tax benefits. It can look identical to your Stocks & Shares ISA but tax will potentially be payable.
Investment bonds have a more complicated tax status but they can be really useful depending on a person’s tax situation.
The account (or product) you choose to use is separate to the investments that will sit within it. The product simply dictates the tax position. It’s the investments inside that will determine if it grows or not!
That’s All Folks!
I think I’ll leave it there for now. I hope you found it useful. It’s been relatively high-level but, hopefully, there’s enough detail for you to get an idea of the mechanics.
As ever, I’m here if you need me. If you want to visit my website, please feel free to do so here.
Speak soon!