Investing can seem daunting, but following these basic principles will provide you with the best chance of reaching your financial goals.
Have a plan
When deciding on a suitable investment strategy, it’s important to be clear on what your invested funds are for and when you might need them. Having a plan for the short, medium and long term is a good place to start. Short-term objectives – for example, home improvements or holidays – are anything you hope to fund within the next five years. Medium-term financial objectives – such as paying for private school or university – are those you feel are five to ten years away. Long-term goals – for example, retirement – are ten years plus.
Investing is for the medium/long-term
When investing in assets such as stocks and shares or property, the value will rise and fall. Whilst positive returns can never be guaranteed, history tells us that real growth is likely to be experienced over the medium to long-term (five years and longer). When investing, you should be confident that you won’t need access to the funds in the short-term, as you could risk selling your investments for a lower value than you bought them for.
Hold cash
Although interest rates offered for cash savings are at historic lows, there are other good reasons to hold cash. Keeping enough cash as a contingency fund should prevent you from needing to draw on invested funds at a lower value than you would like.
When deciding on an amount of cash to hold, it’s useful to work out your essential monthly outgoings and consider holding between three and six months’ worth in cash for a rainy-day, together with enough for any short-term objectives.
For those already in retirement and drawing down on invested funds for income, holding three years’ worth of regular outgoings in cash is a good rule of thumb.
Diversify
It’s wise to spread your eggs across several investment baskets. Spreading your money across different sectors, asset classes and geographical regions will mean that you’re never too reliant on the performance of one particular area. Diversifying means you should be well positioned to capture some return as and when it’s available.
Investing in funds (such as OEICs or Unit Trusts) can be a good way to diversify as they pool investors’ money and can offer access to thousands of different stocks across the globe.
Time is your friend
The earlier you can start investing, the better. The effect of compounded returns year on year is very powerful. A £100,000 investment could grow to over £260,000 in 20 years’ time (based on a 5% annual growth rate), without making any further contributions.
What’s more, when investing on a regular basis, short term drops in market value can even work in your favour. When market values fall, you are able to buy assets at a relatively low value. This means you are well positioned to make a healthy gain following market recovery.
Keep an eye on tax
You are able to hold funds in a variety of tax ‘wrappers’, such as an ISA, Investment Bond, General Investment Account and Pension. Various tax advantages and reliefs are available through the different tax wrappers. Whilst it’s best to not let the tax tail wag the investment dog, in order to optimise investment returns, it’s worth ensuring that you are making best use of your tax reliefs and allowances.
How can we help?
Working with a financial adviser can help to clarify your short, medium and long-term financial goals. A financial adviser can identify the best investment approach to fit with your time scales, attitude towards investment risk, required returns, and ability to cope with investment loss. Your adviser can also help ensure that your investments are structured in the most tax efficient way possible.
The information provided is for general information only and is not intended to address the particular requirements of an individual. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any investment decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided. Different investments carry different risks. Past performance is not necessarily a guide to future performance and the value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invested.
Menzies Wealth Management is authorised and regulated by the Financial Conduct Authority (486548). Registered address: 1st Floor, Midas House, 62 Goldsworth Road, Woking, GU21 6LQ Registered in England and Wales 06597008.
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