For one reason or another, the world of investing eludes many of us. We often consider it to be beyond us, confined to the high-earners and super-rich. But maybe that perspective needs to change…
Although many people now hold a pension through their employer, without additional contributions most of us will find that, on retirement, the final pension pot will be vastly insufficient to meet our retirement objectives.
Given the proposed increases in the State Pension Age and the near eradication of Final Salary pensions, the onus is now on individuals to build an investment portfolio that can be used for their future benefit.
So how do you get going?
1. Define your objectives
The first step before making any big financial planning decisions is to think about what you want to achieve. For many of us, our primary goal will be to build a fund for a comfortable retirement, but investment objectives can be vast and varying. How you go about investing will also be influenced by your current age, your earnings, how long you intend to work for and whether you have dependants.
Taking the time to define your end goals will allow you to work backwards and set out the best way to get there.
2. Budgeting is key
Before making any investment it is vitally important that you have a good handle on your expenditure requirements. We would always advise clients to keep back a pot equal to approximately 6 months’ expenditure in cash as an ‘emergency fund’.
Once you have a pot of cash set aside, analyse your income and expenditure and determine how much you can realistically invest each month. Even if you can only afford a small amount, operating this strategy over a long period of time could have a significant impact on your financial position in the future.
3. Consider risk carefully
Investments such as stocks & shares provide the potential for capital growth over the medium to long term (in excess of 5 years). However, these types of assets are likely to fluctuate significantly in value.
Before making any investment, it is vital that you consider the extent to which you are willing to see the value of your investment fluctuate on a regular basis (i.e. your ability to cope emotionally with fluctuations in value) and your ability to observe fluctuations in the value of your investments without it adversely affecting your standard of living (i.e. how dependent are you on this money?).
4. Be realistic about timeframes
Investing is more about providing ourselves with greater options and flexibility in the future than achieving a strong return today, tomorrow, next month or even next year. When we build investment strategies for our clients, we do so with a time period of at least 5 to 10 years in mind. We are looking to achieve positive returns over the long term. If you are likely to need access to your money within the next 5 years, making an investment now will not be appropriate.
Before making any investment, think about what your objectives are (e.g. school fees, retirement etc.). If you think you might need access to the money within 5 years, you should keep it as cash.
5. Don’t be put off by the jargon
The world of stocks & shares is filled with acronyms and terminology that can be off-putting to even seasoned investors. That said, you do not need to have great expertise in analysing the shares of individual companies in order to make a suitable investment. There are many investment vehicles available that simplify the investment process. Your pension with your employer will use such vehicles to give you exposure to global markets.
Whilst many of these vehicles are heavily regulated in the way they are marketed, always take care to ensure that you understand and are comfortable with any investment you make.
6. Allocate your money sensibly
We’ve all heard of the phrase ‘don’t put all your eggs in one basket’ and this holds particularly true when it comes to investing. You’ll likely have a chunk of money tied up in property already, and it is important that you consider other assets. The long-term aim of sensible financial planning is to build a diversified portfolio of wealth that gives you a greater number of options in later years.
7. Start investing as soon as you can to maximise the benefit of compounding
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein
A strategy that any investor can employ to increase the value of their investments over a long period of time is to maximise the benefit of compounding.
When you deposit money to a cash account, you earn interest. The next year you earn interest on both the cash you originally deposited and the interest earned from the first year. In the third year you earn interest on your original deposit and the first two years’ interest.
The effect applies to investments too and can have significant impact on their value over a long period of time.
8. Don’t try to time the market
Whether you have 30-years’ experience of investing or none, your ability to effectively time the market is limited at best. Often it is the case that delaying an investment only forces you to invest at a higher price further down the line.
To avoid the risk associated with buying at a single cost point you could stage a lump sum investment over a few months, or make monthly contributions on an ongoing basis.
9. Enjoy it!
There is certainly satisfaction to be had out of building an investment portfolio. As you observe the value of your portfolio grow over time, the possibilities of what you could do with the money invested in the future will become more clear and exciting. Getting starting is often the most difficult part, from there, you can hopefully enjoy the ride.
10. Take advice
Although it is possible to go about investing yourself, you will need to consider whether you want to invest your own time in doing this or whether you would rather hand it over to the professionals. Many people decide that the time involved in researching, monitoring, and reviewing their investments would be better spent elsewhere.
Furthermore, you need to be sure that an investment is suitable and affordable. That incorporates considerations of risk, cash flow, and the ongoing assessment of your investment portfolio. This is where the expertise of a wealth management firm is valuable. A financial planner can help you to build a portfolio of suitable investments for specific objectives and control the extent to which it goes up and down in value over the short term.
For more advice on getting started with your investment portfolio or to speak to us about your financial planning needs, please contact us.