Investing wisely is not about guesswork.
Investment decisions need to be based on a plan. Whether you are looking at a simple bank account, a private pension arrangement, or a friend’s start-up company, you need to cover the bases you can and then let the markets do their worst.
Your investment plan centres on you – what you financially need, want and are prepared to risk. It is a vehicle that gradually gets you from where you are to where you want to be, and it works best if you are clear about your future priorities, targets and direction. And that is because, if you know what you want, you know what questions to ask about every investment opportunity you come across.
1. What are your investment priorities?
Remember, it is you – and not anybody else – who is in command of your own financial future; it is you that must take the tough decisions. So make sure you are basing your decisions on the right information, starting with what exactly you want to achieve through your investment.
For example, most people invest with the general aim of a more secure financial future. Others, to build up funds to subsidise a future asset purchase such as a car or a house or to finance their children’s education. Likewise, you need to be clear about what you want out of your investment plan first before venturing out to test potential investment opportunities. Here are a few key questions to get your priorities straight:
What are you investing for?
If you are in your 20s and 30s, retirement might be the least of your priorities. Instead, you might be looking to build up some money to finance your postgraduate qualification, reduce your student debt, invest in your own abode, or to support key milestones of your family life. As you grow older, the importance of maintaining financial independence after retirement is likely to ascend within your list of investment priorities. Knowing what you will be spending your money on and when you will be doing so is as important as knowing where you should be investing it and for how long.
How long are you looking to invest this money for?
This factor will decide the overall shape of your investment plan. For a short-term goal – such as saving for a car or the deposit on a house – where
you put your money will be entirely different from where it goes if you are saving for your pension. Long-term investments such as pension funds can afford to ride out the regular ups and downs of financial markets because after all, they usually enjoy an overall upward trend in the long run whilst beating inflation in the process.
In contrast, short-term investments run the risk of getting caught in a down cycle, so they need to be safer. “Stick to cash savings accounts like Cash ISAs.” Says the UK’s Money Advice Service.
How much of this money can you afford to lose?
What is your risk/reward appetite like? Are you prepared to take a punt or not? Can you really afford to do so? The promise of high yields makes some risk appear acceptable. But be clear: high yield ALWAYS involves HIGH risk. And what’s more, the investment advisory team at Holborn Assets recommends that “investors should maintain a sceptical eye when considering high-yielding investment products and be ready to read into the fine print of all such contracts. Be wary of the authenticity of the product (and the person), hidden charges, delayed costs, regulatory implications, and understand the overall risk of loss before putting your money in any investment.” (See also, Holborn Assets’ take on “How to know if you are Being Pension Scammed”.)
If you still don’t see the pitfalls of unkempt investment decisions, watch this Big Short trailer. The bottom line is that when the stakes are high everyone involved is equally likely to get the short end of the stick, even big banks!
How much of this money might you need back at short notice?
This is much overlooked as a key question you need to ask when you are putting together an investment plan. What is your exit priority? You must be absolutely clear at the beginning as to how much money you can afford not to see for maybe many years to come.
“Successful long-term investors are people who craft a well-thought-out plan and stay consistent with it through the ups and downs of the market,” observes financial journalist Matt Becker. But, if you want the flexibility to move around, you need to make sure you understand what your new investment vehicle is signing you up for.
Some types of investment are based on an agreement that the money is locked in for a certain time. Others levy a hefty fee to prematurely get out of it, with the cancellation of life insurance policies being notoriously costly for example, and certain mutual funds charging what is known as a “redemption fee” when you sell up.
How much of this money will you put up in one go, and when?
You may have a lump sum to invest right away. Or you might be planning staggered payments over the coming years. Either way, how much and how often you can invest is a key factor in making investment decisions.
2. What does your investment plan look like?
The look of your investment plan will depend entirely on what you want out of it. You have specific financial goals – and so your plan is very specific too. But there are, in addition, three features you should be looking for:
Do not get involved with complex financial products until you have had time to get acquainted with their pros and cons. In the meantime, Adrian Lowcock of AXA Wealth suggests that “the best way to grow your savings is to use as much of your annual ISA and pension allowances as you can.” “A good rule of thumb,” agrees the Money Advice Service, “is to start with low-risk investments such as Cash ISAs. Only consider higher risk investments once you’ve built up low and medium-risk investments.”
Give yourself options
When it comes to financial prudence, it is the oldest saying in the book: “Don’t keep your eggs in one basket.” Because, if the basket breaks, you lose all your eggs in one go. Diversifying your investments is the best way to steer clear of financial catastrophe. For a private investor, this means a simple mix of cash, equities (such as shares or funds) and, when possible, commodities such as gold.
Keep a weather eye
It pays to keep an eye on your investments – but not too closely.
On the one hand, an annual review is essential of each and every bank account, holding and contract you have. You need to have the information at hand to change the direction of your investment plan if necessary.
But, on the other hand, do not be tempted to do anything unless you have to! React to day-to-day movements in any market and you are asking for trouble. You have to play the long game. Good investments tend to be long-term. Short-term investments either yield very little or – at the other end of the risk-reward spectrum – are just plain gambles offering high yield but at considerably high risk.
3. What does a good investment look like?
A good investment is one which fits into your investment plan
And that means it reflects your investment priorities, whatever you have nailed them down to be. But there is a lot more to consider than how a single investment opportunity might contribute to the overall strategic picture. There are the particulars of the investment itself.
There is the track record to consider, a full and accurate schedule of future costs to put together, an assessment of any tax liability to be made and – as a priority that should never to be overlooked – a verification of the legitimacy and accreditation of whoever you might be dealing with financially.
None of this due diligence can happen without ALL the information available and a full understanding of the ins and outs of each investment model that comes your way for inspection. You have to know what you are talking about, each and every time.
So, a good investment is one you can understand?
It sounds obvious that you need to know exactly what you are getting into. But understanding investments is not easy.
Financial products are often so complicated that it is difficult to get a general overview of what they involve. Important details, too, are difficult to pick out. This can leave you with nasty surprises in the future. And the temptation is always there to take the assurances of a salesman at face value rather than put in the hours to pore over the paperwork yourself.
But this is your responsibility. You need the information to protect yourself, and you need it for your investment plan to work. You need to understand each and every investment opportunity so you can test it against what you have set out to achieve. As a financial journalist, Matt Becker asks, “How can you understand whether it helps you reach your goal if you don’t even know how it’s supposed to work?”
Stay tuned to the Holborn Assets’ blog for an exclusive series of articles demystifying different types of investments.
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