If you have money to invest but feel confused about what to do with it, then this guide should help you. Investment can seem complicated, with many different options and elements of risk. It may feel that it is something that is scary or untouchable even. It is something that can benefit many people but is often avoided due to misunderstanding or fear. However, there are many options out there and it is worth considering whether any are suitable for you.
It is worth remembering that investments are not the same as savings. There is the possibility of a much bigger return on your money than with a savings account but you will have an element of risk to the investment. This means that the value of the investment could go down as well as up, so you could potentially end up taking less money out than you put in. In order to protect against this you need to invest for a long term. The longer you have your money invested the higher the likelihood that it will increase in value, although in practical terms this will depend on the specific investment and the economic climate. Some people look at investments as a way to make money quickly and this is possible, but there is a very slim chance and this could be seen as gambling rather than investing.
It is important to start off by considering how much risk you are willing to take with your money. It is essential never to invest money that you cannot afford to lose. Hopefully you will not lose it, but there is always a chance and so you need to be careful. Some investments are more risky than others and these tend to have the biggest potential for a good return. So you therefore have to strike a balance between risk and return. If you want to take no risk, then you will be better off putting your money into a savings account which will pay very low interest. However, if you are prepared to take a small risk, then a long term investment could be the way to go. Different types of investments carry different risk levels and so you need to decide whether you would rather have a higher risk with potentially higher returns or lower risk with potentially low returns.
You will also need to consider whether it is money that you will rely on in the future or not. Perhaps you have some pension funds set up and this would be supplementary retirement income and so not necessary and so you may be prepared to take more risk than if it is going to be your only income source. You may want the money to cover a child’s university fees so need to make sure that you have a specific amount by a particular date, so you may not want to risk it, just in case it is not enough money to cover it.
Lump Sum or Regular Payments
You need to know whether you are paying in one lump sum or will be paying in small amounts regularly. This will obviously depend on your financial situation. You may have a lump sum to pay in, perhaps from a savings account and perhaps be able to afford a regular payment too. You may rather make ad hoc payments when you can afford to. Consider which will be most relevant to you as this will influence which type of investment you will be able to have. For some it will not be practical to make regular investments and for others this will be what they are designed for.
It is worth thinking about how long you want the money to be tied up for. You may be putting it away until you retire, for example, or it may be to help out your children with university fees, to put towards a deposit on a house or something else. When you need it will determine how long you will be prepared to tie it up for. This will have an effect on what options you have for investing. Some will perform much better in the long term, than short term. You may also find that you will have to tie money up for a certain period in some types of investment.
It can be really wise to contact a financial advisor once you have established what sort of risk you want to take, how much money you have to invest and whether that is a lump sum, regular payments or both and how long you want it tied up for. They will then be able to show you the options that are available to you. You will have to pay them for their help, but it will be a lot easier than doing all of this research yourself online. They may also have access to opportunities that individual investors do not. Ask them where they invest as this can be a good guide as to what sorts of investments they trust. If they would not invest in a fund, then it will be hard for them to justify a reason for you to do so.
It is really important to make sure that you have a full understanding of the product that you are considering investing in as well as the other options available to you. Do not just rely on a financial advisor to make recommendations but ask them to explain everything to you. Find out why they pick one product over another and why they think certain ones will perform better than others. It should not be that difficult to understand if they explain it to you. Remember that even if they make recommendations, it is your money that is being invested and your responsibility and therefore it the return is not as good as you had hoped it will be down to you.
Everyone will want to invest in the product that will give them the best return on their investment with the lowest risk. However, predicting this is not an easy job. You will need to look at the past performance of the product and use this as a basis to guess how it might perform in the future. Obviously there are no guarantees with this and you may find that something that does extremely well for a long time can suddenly stop performing and vice versa. However, this is really the only way to compare the different products. Considering what the economy will do in the future will also have an effect, perhaps how interest rates might change and the influence of any changes in inflation etc, but this can be very difficult to predict as well.
It can be worth thinking about what sort of return you would like to get and find a product that may be able to give you that and see whether that will mean taking on a level of risk that you are prepared to accept. This is almost the opposite way to the above, but could be more helpful if you want to gain a certain income from your investment.
Buying managed funds is one way to help you to feel more confident about the returns. A fund manager is paid to track the investment and the products that it is invested in and to make necessary changes to keep the return as high as possible. This means that you should get a better average return and you will be able to let them worry about any changes to the market. However, fund managers have to be paid and so part of the return on the investment will be used to pay them. This means that the money that you get back will be less than if you chose an unmanaged fund. However, if it is unmanaged, it will be up to you to track it and decide whether you should stick with it or not. This can be harder and changing investments can be expensive as there may be fees and tax to pay when you sell or buy, which will not happen on a managed account.
Many people invest so that they have an income for their pension. A pension fund can seem very complicated though. You usually pay in regularly leading up to retirement and then on reaching retirement age, the fund becomes available to you so that you can buy an annuity which is an investment that will pay you a regular income all the way through your retirement. These are very worthwhile if your employer contributes and you live a long time after retirement, but if you do not have a work pension, perhaps due to doing part-time work or being self-employed then you will only be able to choose a personal pension. These may not be the best option for retirement as you do not have the tax gains that work pensions attract and no extras paid in by employers. Pensions are risky too as you may die before you start drawing any out or after a short period and then that fund may be lost.
Unit trusts are a way of buying shares which is seen as safer than just picking one company to buy shares from. A unit trust is a spread of shares from different companies which means that there is less risk. If one company performs badly, then it is unlikely that the rest will and therefore the risk is spread. Often a poorly performing company will be moved from the holding and replaced by another one anyway. There are many different unit trusts to choose from and so it is worth looking carefully at the past performance of the different ones to see which look like they may perform the best in the future.
An alternative way to invest is in property. There has been a switch in recent years of people investing in property rather than the stock market. This has partly been due to rapidly increasing house prices as well as the stock market falling and has led to an increase in buy-to-let mortgages. There are advantages and disadvantages to doing this.
With a property you are risking all your money in one thing. This means that if the value drops, perhaps due to flooding, soil contamination, the area becoming less popular etc, then you will not get your money back if you decide to sell the property, particularly in the short term. Many choose to rent out the property and get some income from that. This can be a good way to cover the running costs of the home and provide some income, but if the property is empty it may be difficult to manage mortgage repayments on it. Selling a second home also attracts capital gains tax, but if it left as part of an estate it will have the same inheritance tax as money invested in the stock market would.
Many people choose property because it seems easier to manage than shares. However, unless you employ an active rental agent you will have to be available to sort out any problems the tenants have, organise any repairs they need etc. You may need to redecorate for them frequently and you will of course need to pay insurance on the property as well as contents insurance if you are renting it out furnished. Many people fail to consider all of the costs when they buy a property and then find that the rental income is not enough to cover them all. However, if the property is being bought so that it can be sold at a profit in the long term, then these short term costs could be worthwhile. If a property is bought without a mortgage, then it is much more likely that rental income will cover the costs as long as there is a tenant in there.