Get the basics on investing
Investing can appear daunting, but in reality, it might be more straightforward than you think. We'll take you through the basics of investing so you can consider whether it's right for you.
The first step is always to think about what you want to achieve and by when, placing each of your goals into either a short-term goal category (five years or less) or a medium to long-term goal category.
Your short-term goals are for the next big purchases you want to save for such as a new car, a holiday of a lifetime, or a wedding. Whatever the reason, you will probably want to save as risk-free as possible and get immediate, penalty-free access to your money. For short-term goals you should save rather than invest – and it makes sense to put your money in a bank savings account offering a high interest rate and easy, penalty-free access to your money.
Medium to long-term goals
For money you are likely to need in five years' time or more, think of it as 'investing' rather than 'saving'. You could be saving for a deposit for a house, paying your child's university fees or for something longer-term like saving for a comfortable retirement.
To truly grow your money, you will need to beat inflation as the effects of inflation can really eat away at your savings. To get the best chance of growing your money, you will need to be willing to take some risk and to put your money away for a minimum of five years.
There are many investment products in the market that you can choose to put your money in such as stocks and shares, investment accounts and investment bonds. Once you and your adviser decide which product is right for you, you can start thinking about where to invest.
But, before you decide where to invest your money, it's important to think about how much risk you are willing to take and how much you can afford to lose.
You have to accept some level of risk when you are investing but how much depends on what you want to achieve and how quickly you want to grow your money. You also need to think about how much you can afford to lose if your investments go down.
Risk versus reward
When you invest, a good rule of thumb is the more risk you take, the greater the potential for reward but on the flip-side, there is a greater chance of losing your money. Taking less risk means your investments are less likely to achieve high growth, but you are also less likely to lose as much as you would if you had chosen a riskier investment.
Time is a great healer
Time gives your investment more time to recover if it falls in value. So, if you have a medium to long-term goal you may have to be prepared to take on more risk for the opportunity of a greater reward. But you need to consider how you would cope with losing some or all of your money. You could probably cope with losing your holiday fund but how would you feel about losing your retirement savings?
That's why when your medium to long-term goal is close to being achieved, you should think about taking less risk with your investment as you will not have enough time to recoup any losses. Ultimately, it is down to you and your financial adviser to find the perfect balance for you and this will vary depending on how much you have to invest, what stage of life you have reached and what you are trying to achieve.
You can invest directly in assets or you can invest in assets through a fund. Let’s look firstly at the different types of assets.
Types of assets
There are four main types of assets to choose from and each one works in different ways and carries its own particular risks.
Money on deposit (e.g. cash in a bank), the risk level is much lower than other assets, but so are the potential returns – especially when you consider the effect of inflation.
Bonds & Gilts
Loans made to companies or governments which pay an agreed rate of interest until a set date. Gilts are usually less risky than bonds but their potential for returns is lower. Generally, bonds carry more risk, but the potential rewards can be greater than gilts.
Money invested in commercial property that aims to deliver rental income as well as capital growth. Investing in property carries risk as property values can fluctuate meaning you could lose some or all of your money. Also, you might not be able to get your hands on your money very quickly as the property may have to be sold first to release the cash.
Stakes in companies (often called equities) where the growth depends on several factors including how well those companies perform. Different shares carry different risks and also different levels of risk. There is a chance you could lose some or all of your money.