Savings & Investments: Top Tips - Part 2
In this second article in the series we will be focusing exclusively on investments. Investments are for the longer term – at least 5 years, as opposed to savings which are for the shorter term. Investments usually imply a degree of risk. The main reason for accepting risk is to try and achieve better returns than normal savings. That is important if you are trying to maintain and grow your money relative to inflation. As a saver, inflation is your enemy because it erodes the value of your capital.
1. Set your Budget
Decide how much you can afford to set aside for the longer term. This applies whether you are considering a lump sum investment, regular investing or a combination of the two. Investments, by their very nature, may fall as well as rise in value. You need to be committed for long enough to allow values to recover if they go through a rough patch (which they will from time to time!).
2. Set your Goals
Are you investing for something specific such as a dream holiday, a car or a bigger house? Or are your goals more general at this stage – retirement, helping the children/grandchildren, just staying ahead of inflation? Be clear on what you are trying to achieve and over what period of time.
3. Use Common Sense
If you want to (or need to) do only a little bit better than ordinary savings then you only need to accept low levels of risk. If you want to (or need to) do a lot better than ordinary savings then you need to accept a lot of risk. So, make sure you know what risk-free return you can get from your savings (about 2% per annum at present) and use this as your yardstick. Anyone or anything offering high returns with low risk is to be avoided. That is just common sense.
4. Be clear about Risk
This is hugely important. Investments do not grow in a straight line. They go up and down in value for all kinds of reasons. Some types of investment will go up and down more than others. They may do so for different reasons and at different times. Some investments will tend to recover quite quickly, others may take longer. Think also about liquidity. Some investments cannot be cashed in quickly or may be subject to restrictions at certain times.
5. Dos and Don’ts
As investors we are definitely capable of being our own worst enemies. Don’t try and double guess the markets. Don’t buy something just because it did well last year. Don’t sell at the first signs of trouble – how will you know when to buy again? Don’t judge an investment just on the returns it has made – focus on how those returns were achieved and how much risk was involved.
6. Take Advice
Take professional advice when you start to feel out of your comfort zone. Why just guess or follow the latest fad when a qualified professional will ensure that you have exactly the right investments in the right place at the right time?
In the next articles in this series we will focus on how to put together an actual investment portfolio based on your goals, your time-scale and your views on risk.
To discuss further or to arrange a face to face meeting please contact us.