Investing

• Your current financial circumstances: How much do you have to invest? Is this the best way for you to be using surplus money? Do you have debt with a crippling interest rate that you should be paying off first? Do you need to save money for a contingency fund, or something else you’re likely to need in the immediate future.
• Your long, to medium and short-term financial and lifestyle objectives: What big plans do you have for the next five, 15, 30 years? What do you want the income you expect to generate through investing to be used for? What is the reason you are investing? These are important questions that will establish much of your investment strategy so it’s worth defining your goals before you start.
• The time frame within which you want to see returns: Are you comfortable with leaving your investments for five years at the very least? The longer you can leave your money in the markets, the greater the opportunity for growth.
• How involved you want to be with investment decisions: Are you going to be a hands-on investor? Involved in decision making? Or do you want to hand all the key decisions to a professional portfolio manager?
• Your appetite for, and tolerance to, risk: How much can you afford to lose, and how comfortable are you with different levels of risk? How close are you to retiring? (You’ll not want to invest in anything too risky if you are going to need to rely on your investment income within the next few years.) All reputable providers should have this conversation with you early on and tailor all investments to your appetite for risk.

If your financial goal is a long way in the future, you may be prepared to accept a higher level of risk because, if you suffer financial losses, you will have more time to recover your position.

If your goal is more short-term, such as saving for the deposit on your first home, you should consider moving money into safer havens.

The theory is that by having a mix of asset classes, you can offset any losses in one asset class with gains made in another and protect your portfolio against an overall decline in value.

Although having an asset mix across different asset classes won’t ensure gains or guarantee against losses, it is a way of “hedging your bets”.

You should consider whether to adopt a passive or active strategy, what you want to invest in, how long you intend to stay invested, and whether you wish to choose investments screened along ESG (environmental, social and governance) principles.

You may decide that this part is something you’d like a financial planner or adviser to help you with. It’s always worth taking professional advice if you have any questions about how to build and manage an investment portfolio.

Consider your asset allocation. That means how you wish to divide your money between the different asset classes (stocks, bonds, funds, etc.). Most investors diversify to lower their chances of losing a significant amount of money if one particular asset class suffers losses.

Investing in funds can be a good way to diversify your portfolio without needing to do a whole lot of research and analysis into individual stocks.

If you’re feeling overwhelmed by the variety of options available to you, start simple. You can always move onto more complex, specialised products as your confidence grows.

The most common types of investment are

• Stocks (also called equities)
• Bonds
• Funds

As a shareholder, the value of your shares will rise and fall with the share price. If a company performs well (or is expected to), demand for its shares will generally go up, increasing the share price. If a company does badly (or is expected to), its share price will typically go down.

Remember, while the money you invest has the potential to grow, it could also fall in value, so you may get back less than you invested.

Bonds are also known as fixed income securities, or fixed assets. Unlike stocks, bonds do not give you ownership rights so you don’t benefit from dividends or rises in the company’s value. But you also won’t see as much of an impact if the value of the company falls, either.

Their strengths lie in their reliable source of income (interest rates paid on the money you’ve loaned) and their lack of volatility. Bonds are often used to help lower the overall risk in pension pots when recipients get closer to retirement but still want something more potentially profitable than a savings account.

Although bonds are generally seen as less risky than equities, they are not risk-free and unless you buy a guaranteed bond, there’s a chance that you won’t get back what you originally paid.

They are generally considered a good way to keep risk levels low.

Examples of funds include:

• mutual funds
• exchange-traded funds (ETFs)
• index funds
• hedge funds

They are generally considered a good way to keep risk levels low.

Examples of funds include:

• mutual funds
• exchange-traded funds (ETFs)
• index funds
• hedge funds

It’s an account you can choose to hold your funds or shares in to make them tax efficient. With a Stocks and Shares ISA, you will not need to pay Capital Gains Tax.

If you invest directly, you have additional fees to look out for too, like dealing charges. If you’re not doing things yourself, you might need to pay fees for fund platforms or financial advice.

Always seek out the ‘Key Investor Information Document’ (KIID) and then look for the Ongoing Charges Figure (OCF). The OCF takes into account the annual management charge (AMC) and all the expenses of running the fund that go towards your final cost.

And that’s a good way to think about investing; you are planting a seed with the aim of future growth.

However, the best time to invest will be entirely unique to each individual. Always start with a risk assessment and weigh up what priorities you have in your life now and what the best use of any surplus cash might be.