Invest Money – Forbes Advisor UK

Before deciding on the type of investments to make, think through the following questions to help you make the right investment plan for your circumstances:

1. What are your financial goals?

Start by setting your overall financial goals. Short-term goals might include buying a car or putting money aside for a deposit on a house in the next two or three years.

You may have medium-term goals, such as setting up a fund to support your children, or going on a one-off vacation.

Long-term goals could be to start investing in a personal pension to supplement your state pension.

It is important to set your financial goals at the outset so that you can match the most suitable investments in terms of time periods, along with the associated risk and returns.

2. How much can you afford to invest?

After we set aside money for a rainy day fund, the next decision is how much to invest.

It’s a good idea to work out if you have 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 build your investment pot over time. Or you can look at investing a lump sum such as a bonus or inheritance.

Whichever option you choose, you need to work out how much money you can invest and whether you might need to access this money in an emergency.

3. How much risk are you willing to take?

In general, there is a correlation between risk and return – investors who are willing to take on a higher level of risk may be 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 their current trading price).

Investing in the stock market is more risky, but the FTSE All Share Index has delivered an average annual return of 10% over the past 30 years, according to Vanguard Asset Management.

Within the stock market itself, there is a wide variation in risk and returns. For example, among the 57 investment sectors, Latin America delivered one of the highest returns of 5% to date in 2022 – but after achieving the lowest returns across sectors in the previous two years, with negative returns of 12% and 15 %. in 2021 and 2020 respectively, based on data from Trustnet.

4. What is your time frame?

After deciding on your financial goals, you need to work out how long you want to invest your money. In general, you should look to invest for at least five years – stock markets can go down as well as up, and this helps you level out the average return.

Investing for less than five years can present challenges. If you need to access your money at short notice, and your investments have temporarily declined in value, you may be selling them at a bad time.

If you may need to access your money in the next few years, you would be better advised to keep your money in savings accounts where your capital is protected.

Similarly, if you want to invest for a longer period, such as for a pension, you can choose higher risk options as your investments have time to recover from any drop in value.

Whatever your chosen time period, it is wise to change the balance of your portfolio as you approach the time to sell the investment. Selling a portion of your stock market investments over time and depositing the proceeds in a savings account protects your money from a short-term drop in the stock market.

5. Are you looking for income or capital growth?

There are two types of return on investment – ​​’capital’ growth (an increase in the value of your investment), and income.

With a savings account you receive an income in the form of interest. With investments, this usually takes the form of dividends – these are cash payments that a company makes to shareholders, usually on an annual or semi-annual basis.

Although many people invest in the stock market for capital growth, the ability to produce an income stream can be useful. For pension investments, an income stream can be used in retirement, while the capital invested grows in value and produces income in the future.

However, there can be a trade-off between income and capital growth. Some of the high-growth US technology companies prefer to reinvest surplus profits rather than pay a dividend, which should theoretically lead to higher capital growth. In contrast, some lower-growth, blue-chip companies in the UK pay regular dividends to shareholders.

You can usually buy ‘income’ or ‘accumulation’ units if you buy a fund-based investment. With ‘income’ units, any dividends or income are paid out in cash to investors, while this income is reinvested to purchase additional units under the ‘accumulation’ option.