With so many different investment options available, how do you decide what is right for you? When it comes to investing any sum of money, the best way to start is by answering the following key questions:
How long do you plan to keep your money invested?
If you want to use the money for something in, say, three years’ time, this may not be long enough to invest in the stock market. However, if there’s no immediate need for the money, you may want to think about making a higher risk investment. Although this may produce better returns, it could also mean that the overall value will decrease rather than increase when you need to sell. This is because market performance never goes in a straight line. However, when you have ‘crashes’, markets do recover in time. The longer you are able to leave your money invested, the greater are the chances of the investment increasing in value and ultimately showing significant growth.
What is your appetite for risk?
While you might feel that you are opposed to any sort of financial risk, it’s really important to understand which investments are ‘risky’ before you start on your investment journey. Your tolerance for risk is a very personal characteristic, which may change over time. Your emotional make-up plays a big role in your willingness to take risks. But your ability to carry some risk, given your wealth and financial needs, is important too. Your age may also affect how much risk you can bear. For example, as you grow older, there is less time to recover from poor investment results and your appetite for risk may change – but your wealth and circumstances will probably change too.
How interested are you in the investment process?
People often want to know how and where their money is invested. You need to ask yourself if you are happy just receiving a decent return on your investment or whether you would prefer to know that your money is invested in a specific asset, such as property.
How involved do you want to be?
You also need to consider how involved you want to be in the investment process. For example, if you are very concerned about social responsibility, you may want to know more about the underlying investments and to be kept informed of any changes in your portfolio. However, you may not have the time or the inclination to get too close to the process. In that case, you may want to opt for a full discretionary approach, where the investment decisions are made on your behalf by an investment manager.
A financial adviser can work with you to help you answer these questions. They will then use your answers to develop a comprehensive investment plan which then constitutes the basis of your investment relationship. Together with your financial advisor you should be able to determine a target rate of return and an appropriate mix of assets to include in your portfolio.