Contributed by Bill Blevins
How should I select
The first step, before making any decision on how to save or invest your money, is to set out a plan. Establish what it is you want to achieve and then look for the best advice to help make the investment choices to take you from where you are today, to where you wish to be in the future. Your goals could include:
• Setting up a business.
• Building a nest egg.
• Helping your children have a better future.
• Lowering your tax bills.
• Increasing your retirement income.
• Long-term financial security.
• Beating inflation to ensure that your money won’t expire before you.
Don’t select investments because they sound attractive, or are the “flavour of the month”. You may need advice to seek out the huge range of investment choices available to meet your objectives and establish the strategy to achieve the results you are seeking.
Is the bank the safest place
for my money?
If your goals are short-term ones, like a forthcoming holiday or redecorating the house, a deposit account will be very useful. Look around for the best interest rate offered by reputable banks. It is also wise to leave enough money in a deposit account to cover any unexpected expenses.
Relying on cash for your long-term financial security however, is not as risk free as you may think. The security offered by bank deposit accounts comes at a price – you could end up with less money than you need because of increasing inflation. Deposit accounts do not achieve any capital growth. Interest rates can fall and tax rates rise. As the years go by inflation will reduce the spending power of your deposits significantly and could affect your future lifestyle. At 3.9 per cent per annum, inflation will reduce your capital and spending power by around 50 per cent in just 10 years!
How can I structure my
investments to reduce risk?
Diversification is the key to reducing risk. By investing in a few different investment assets, each spread over a range of different regions and sectors, you will reduce the overall risk element of your portfolio. If a particular market goes through a downturn, your other investments will protect the overall portfolio. You will also be more likely to have investments in the areas, which are doing well at a particular time.
Investment assets can include equities, equity funds, bonds, property funds and so on, and perhaps a 100 per cent capital guaranteed investment to help decrease risk still further.
Should I try to time the markets?
Are you a speculator or investor? If you’re investing for your long-term future, trying to time the markets is not a good idea – it’s impossible to be sure how the markets are going to move. If you get the timing wrong you could lose a lot of money … or you could miss out on earning money.
Research shows that missing out a few good days can have a significant effect. For example, if you had invested 3,000 pounds sterling in a fund tracking the FTSE UK All-Share index for 10 years to the end of 2005, your investment would have risen to 6,418 pounds sterling. If you had missed the 10 best days in that period, your 3,000 pounds sterling investment would only have increased to 4,262 pounds sterling.
If you try and time the markets you run the risk of investing too late and/or selling at the wrong time. It is time, and not timing, that produces the best long term results.
How important is
The risk warning that past performance is not a guide to future performance shouldn’t be ignored, especially if the performance figures span a short space of time. Such results may be down to luck, a market upswing or a good fund manager, who has since left the fund. If market conditions change, the fund may no longer perform as well.
What you really need to consider is how the fund will perform in the future – after all, this is what will affect your money.
Should I choose the fund with the lowest charging structure?
If you own a good quality car, one which you worked hard to be able to afford, do you get it serviced by the cheapest mechanic or one with experience and expertise in the brand you have purchased and who you trust to keep it in top condition?
It’s the same with your money. You should understand how the charging structure works and establish that you’re not paying over the top for the services offered … but, if you want your money looked after by experts then you may have to pay something to obtain the best adviser for your purposes.
How often should I review
It’s important not to react every time the markets take a dip. It’s easy to panic when markets fall, but if you’re invested for the long-term, your portfolio will have time to ride out the fluctuation and proceed on track.
You do need to review your portfolio occasionally (say every six or 12 months) to ensure it’s still on track to meet your objectives. If your circumstances have changed you may well need to adapt the investment structure.
A review is also a good opportunity to consider what to do with your profits. Should you leave them in the fund to benefit from increased capital growth, or should you perhaps secure them by moving them into a capital guaranteed product?
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