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Investing money – Forbes Advisor UK
Before deciding on the type of investments to make, you should think about the following questions to help you create the right investment plan for your circumstances:
1. What are your financial goals?
Start by establishing your overall financial goals. Short-term goals might include buying a car or setting aside money for a house deposit in the next two to three years.
You may have medium-term goals, such as building a fund to support your children or taking a once-in-a-lifetime vacation.
Long term goals might be to start investing in a personal pension to supplement the state pension.
It’s important to define your financial goals early on so you can match the most suitable investments in terms of timeframes, along with the associated risk and return.
2. How much can you afford to invest?
Once you’ve set aside money for a bad-day fund, the next decision is how much to invest.
It’s a good idea to figure out if you have any money left over at the end of the month after paying your expenses. If so, you may want to consider investing a regular amount each month to grow your investment fund over time. Or you could consider investing a lump sum such as a bonus or an inheritance.
Whichever option you choose, you should calculate how much money you can invest and whether you might need access to this money in an emergency.
3. How much risk are you willing to take?
Overall, there is a correlation between risk and return: investors who are willing to take on a higher level of risk are potentially rewarded with a higher level of return.
Government bonds or “gilts” are considered low-risk investments and currently offer a yield or “yield” of 1-2% (based on the current trading price).
Investing in the stock market carries greater risk, but according to Vanguard Asset Management the FTSE All Share Index has produced an average annual return of 10% over the past 30 years.
Within the stock market itself, there is wide variation in risk and return. For example, among 57 investment sectors, Latin America has provided one of the highest returns of 5% to date in 2022, but after recording the lowest returns across all sectors over the previous two years, with negative returns of 12% and 15%. in 2021 and 2020 respectively, based on Trustnet data.
4. What is your time frame?
After deciding on your financial goals, you should figure out how long you want to invest your money. In general, you should try to invest for at least five years: stock markets can go down as well as up, and this helps smooth out average returns.
Investing for less than five years can present challenges. If you need access to your money at short notice and your investments have temporarily lost value, you may be selling them at a bad time.
If you may need access to your money in the coming years, we recommend keeping it in savings accounts where your capital is protected.
Similarly, if you are looking to invest for a longer period of time, such as for a pension, you can choose higher risk options as your investments have time to recover from any drop in value.
Whatever time period you choose, it is advisable to adjust your portfolio balance as the time to sell your investment approaches. Sell a portion of your stock market investments over time and deposit the proceeds into a savings accountprotects your money from a short-term decline in the stock market.
5. Looking for income or capital growth?
There are two types of investment returns: “capital” growth (an increase in the value of your investment) and income.
With a savings account you receive income in the form of interest. In the case of investments, it usually takes the form of dividends: these are cash payments made by a company to shareholders, usually on an annual or semi-annual basis.
While many people invest in the stock market for capital growth, the ability to produce an income stream can be helpful. For retirement investments, you can use an income stream during retirement, allowing your invested capital to grow in value and produce income in the future.
However, there can be a trade-off between income and capital growth. Some of the high-growth U.S. tech companies choose to reinvest excess profits rather than pay a dividend, which should theoretically lead to higher capital growth. Conversely, some with lower growth, blue-chip companies in the UK they pay regular dividends to shareholders.
You can usually buy “income” or “accumulation” shares if you buy a fund-based investment. With “income” shares, any dividends or income are paid in cash to investors, while this income is reinvested to purchase additional shares with the “accumulation” option.