It’s well worth taking the time to think about what you really want from your investments. Knowing yourself, your needs and goals and Your appetite for risk is a good start, so start by filling in a Money fact find.
Think about how soon you need to get your money back. Time frames vary for different goals and will affect the type of risks you can take on. For example: If you’re saving for a house deposit and hoping to buy in a couple of years, investments such as shares or funds will not be suitable because their value goes up or down. Stick to cash savings accounts like Cash ISAs. If you’re saving for your pension in 25 years’ time, you can ignore short-term falls in the value of your investments and focus on the long term. Over the long term, investments other than cash savings accounts tend to give you a better chance of beating inflation and reaching your pension goal.
Once you’re clear on your needs and goals – and have assessed how much risk you can take – draw up an investment plan. This will help you identify the types of product that could be suitable for you. A good rule of thumb is to start with low risk investments such as Cash ISAs. Then, add medium-risk investments like unit trusts if you’re happy to accept higher volatility. Only consider higher risk investments once you’ve built up low and medium-risk investments. Even then, only do so if you are willing to accept the risk of losing the money you put into them.
It’s a basic rule of investing that to improve your chance of a better return you have to accept more risk. But you can manage and improve the balance between risk and return by spreading your money across different investment types and sectors whose prices don’t necessarily move in the same direction – this is called diversifying. It can help you smooth out the returns while still achieving growth, and reduce the overall risk in your portfolio.
Investing can take up as much or as little of your time as you’d like: If you want to be hands-on and enjoy making investment decisions, you might want to consider buying individual shares – but make sure you understand the risks. If you don’t have the time or inclination to be hands-on – or if you only have a small amount of money to invest – then a popular choice is investment funds, such as unit trusts and Open Ended Investment Companies (OEICs). With these, your money is pooled with that of lots of other investors and used to buy a wide spread of investments. If you’re unsure about the types of investment you need, or which investment funds to choose, get financial advice.
If you buy investments, like individual shares, direct, you will need to use a stockbroking service and pay dealing charges. If you decide on investment funds, there are charges, for example to pay the fund manager. And, if you get financial advice, you will pay the adviser for this.
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