Investing is a lifelong process, and the sooner you start, the better off you may be in the long run
A total wealth solution has no value unless it is properly
implemented through an appropriate investment strategy. If you’ve got a
sufficient amount of money in your cash savings account – enough to cover you
for at least six months – and you want to see your money grow over the long
term, then you should consider investing some of it.
Investing is a lifelong process, and the sooner you start,
the better off you may be in the long run. Regardless of the financial stage of
life you are in, you will need to consider what your investment objectives are,
how long you have to pursue each objective, and how comfortable you are with risk.
Current finances and future goals
The right savings or investments for you will depend on how
happy you are taking risks and on your current finances and future goals. Investing
is different to simply saving money, as both your potential returns and losses
are greater.
If you’re retiring in the next one to two years, for
example, it might not be the right time to put all of your savings into a
high-risk investment. You may be better off choosing something like a cash
account or bonds that will protect the bulk of your money, while putting just a
small sum into a more growth-focused option such as shares.
Choosing your savings and investments
You may be a few months away from putting down a deposit on
your first property purchase. In this case, you might be considering cash or
term deposits. You might also choose a more conservative investment that keeps
your savings safe in the short term.
On the other hand, if you have just recently started working
and saving, you may be happy to invest a larger sum of your money into a higher-risk
investment with higher potential returns, knowing you won’t need to access it
in the immediate future.
Different types of investment options
If appropriate, you should consider a range of different
investment options. A diverse portfolio can help protect your wealth from market
corrections. There are four main types of investments, also called ‘asset
classes’, each with their own benefits and risks.
These are:
• Shares – investors buy a stake in a company
• Cash – savings put in a bank or building society account
• Property – investors invest in a physical building,
whether commercial or residential
• Fixed interest securities (also called ‘bonds’) –
investors loan their money to a company or government
Defensive investments
Defensive investments focus on generating regular income as
opposed to growing in value over time. The two most common types of defensive
investments are cash and fixed interest.
Cash investments include:
High interest savings accounts
The main benefit of a cash investment is that it provides
stable, regular income through interest payments. Although it is the least
risky type of investment, it is possible the value of your cash could decrease
over time, even though its pound figure remains the same. This may happen if
the cost of goods and services rises too quickly (also known as ‘inflation’), meaning
your money buys less than it used to.
Fixed interest investments include:
Term deposits, government bonds, corporate bonds
A term deposit lets you earn interest on your savings at a
similar, or slightly higher, rate than a cash account (depending on the amount
and term you invest for), but it also locks up your money for the duration of
the ‘term’ so you can’t be tempted to spend it.
Bonds, on the other hand, basically function as loans to
governments or companies, who sell them to investors for a fixed period of time
and pay them a regular rate of interest. At the end of that period, the price
of the bond is repaid to the investor.
Although bonds are considered a low-risk investment, certain
types can decrease in value over time, so you could potentially get back less money
than you initially paid.
Growth investments
Growth investments aim to increase in value over time, as
well as potentially paying out income. Because their prices can rise and fall significantly,
growth investments may deliver higher returns than defensive investments. However,
you also have a stronger chance of losing money.
The two most common types of growth investments are shares
and property.
Shares
At its simplest, a single share represents a single unit of
ownership in a company. Shares are generally bought and sold on a stock
exchange.
Shares are considered growth investments because their value
can rise. You may be able to make money by selling shares for a higher price than
you initially pay for them.
If you own shares, you may also receive income from
dividends, which are effectively a portion of a company’s profit paid out to
its shareholders.
The value of shares may also fall below the price you pay
for them. Prices can be volatile from day to day, and shares are generally best
suited to long-term investors, who are comfortable withstanding these ups and
downs.
Although they have historically delivered better returns
than other assets, shares are considered one of the riskiest types of
investment.
Returns
Returns are the profit you earn from your investments.
Depending on where you put your money, it could be paid
in a number of different ways:
• Dividends (from shares)
• Rent (from properties)
• Interest (from cash deposits and fixed interest
securities)
The difference between the price you pay and the price you
sell for makes up your capital gains or losses.
What Next?
The beginning of a new year is the perfect time to consider
your existing financial goals and decide if they still align with your
priorities. It may also be a good time to check if you have the right systems
and support needed to achieve these goals when you want to. If you’d like to
know more about how we can help you achieve your financial and life
goals, please
contact us.
The value of your investments (and any income from them)
can go down as well as up, and you may not get back the full amount you
invested.
Information is based on our current understanding of
taxation legislation and regulations. Any levels and bases of, and reliefs
from, taxation are subject to change.