OPINION
Investing has never been easier but you must follow certain rules (Image: Getty)
Many people think investing just isn’t for them, it’s only for the wealthy. And this can make them shy away from trying to get the best returns on their hard-earned money. But anyone who has a pension is investing already – and that is now the majority of workers as they have been auto-enrolled into workplace pensions. It’s typically a lack of confidence and understanding of the financial world that puts up barriers and prevents people from dipping their toes into the world of investments.
Keeping money in cash may seem the safest option but the returns are low on cash investments and . Over time inflation will eat away at the buying power of cash – unless you are getting a return that is above , which is unlikely in the current climate. Taking some risk is the way to help your money work for you and build wealth. But you need to think before rushing into investments. There are things you need to consider, don’t just rush in.
Nine rules for investing
1. Emergency – before you even think about investing any money you need to ensure you have an emergency fund in place, typically three to six months’ worth of your regular outgoings. This is to help ease any unexpected life events or bills. A financial cushion, that is easily accessible, means you won’t be pushed into selling investments at a time when markets may be low and you could make a loss.
2. Plan – knowing what you want to achieve in the short, medium and longer term will give you a purpose. You need to know why you are investing, what you want to achieve and your time scale. Then you can plan what type of investments you need to help you to reach your goals. Whether that’s buying a home, a fund for a big family celebration such as a wedding, the dream of a second home abroad or building up enough money to give financial security for you and your family into retirement and beyond. There are a huge range of investments from basic ISAs to stock and shares, bonds and specialist areas such as property, small businesses, art and wines. Working with a wealth adviser can help you to find the ones that will be right for your circumstances and risk appetite and to help you reach your goals.
3. Risk – understanding the risk involved is crucial. You need to consider how you would feel if your lost some or all of the money invested. Anything you do around investments, involves risk, and its vital you determine what your personal level is, so you can ensure you pick investments that match that. Even if you keep your money in cash which may feel like the safe option. Inflation can gradually erode its buying power. If you have savings accounts such as Cash ISAs you are likely to be getting low amounts of interest. If this is below the rate of inflation, which these typically are, you will be in effect losing money. Inflation can eat away at cash.
4. Realistic – managing your expectations is vital. Investments can go down as well as up. There are no guaranteed returns, and they are rarely immediate. The MSCI Global Growth Index has on average returned circa 7-10% per annum on investments but these are not consistent. There will be years of both growth and decline. But over the longer term the growth years help to even things out and offset the tougher times.
5. Regularly – investing little and often can be better than risking large sums in one go. Starting early and investing regularly means you can take advantage of compounding, earning growth on growth. Investing is typically associated with the wealthy, but anyone can start with small amounts, investing regularly to build up wealth. If you take investing £100 per month in the MSCI Global Growth Index for the next ten years, you will have circa £13,627 if the average annual growth rate was 8% on your money.
6. Diversification – now more than ever diversification is key as we start to see volatility creeping back into the stock market, largely driven by Trump and tariffs. Spreading investments across different assets, sectors and geographies will help reduce your chances of risk If you put everything into just a few assets that risk becomes high. When one stock or asset performs badly, your whole portfolio may suffer. Whereas with a diverse portfolio while one area may not be performing well, others could be doing well, balancing out any losses.
7. Term – for the chance of success with investments you need to think long term. You need to stay strong and weather the tough times. Don’t be tempted to sell at the first sign of a loss. When markets are volatile you need to stand firm. Buy low and sell high is the adage.
8. Reassess – it’s important to review investments regularly so you know how they are performing against your ever-changing personal circumstances, timeframes and your risk tolerance as all can change over time. Your goals may change and you may need to rebalance your investments, change the mix. As you get closer to your goals you may want to reduce your exposure to riskier investments.
9. Stick to your plan. There is always constant chatter about market movements, inflation and share tips. Don’t make any hasty decisions to cash in investments. Keep your original plans in mind and stay focused.