Choosing to invest your own money is a decision that should not be made lightly. Sure grabbing a piece of stock market action can be tempting for many new investors, but these tantalising rewards come with a high element of risk.
A Few Things to Consider
1. What are your financial goals?
Make sure that you set clear objectives of what you want to achieve by investing. Are you looking to grow your money? Are you looking to provide an income? Is there a set amount that you want your money to grow by?
These question needs to be answered before you start investing any of your own money.
2. What’s your timeframe?
Once you know what your goals are, you then need to think about how long you will need to achieve them. Remember to be realistic with these estimations, as this will give you a clear idea of the desired rate of return. Generally, a medium-term investment is considered to be between 5-10 years, while long term investments, such as SIPPs, are usually over 10 years. Also note that once in a pension your money is only accessible, in general, from age 55 and the value of any SIPP tax advantages will vary according to individual circumstances. Read our full guide to cashing out a pension here.
It is also important to note that some investments become less relevant as you become older, and if you are retired, you need to consider that your capacity to earn is diminished.
3. Build a Balanced Portfolio
You may have heard investment professionals talk about the need to build a balanced portfolio spread across a variety of assets. But what exactly does this mean?
Well, put simply, it is vital for all investors to spread the assets in their portfolio between different investments such as property, cash, fixed interest, and equities depending on the overall investment objective. But this is not the only thing that you need to consider, as a good portfolio will have investments in a variety of sectors and geographical locations.
Getting this balance is vital if you want to achieve your financial objectives. Fail to do so and you may end up with a portfolio full of the wrong kind of investments.
Are You Ready to Invest?
Investment means risking your own finances. While this may seem obvious, it is important to state again and again. This is not necessarily a bad thing, as bigger risk can mean bigger rewards, but there is a possibility that you could end up losing all of your money. And this can be particularly problematic if you don’t have the capital to lose.
So before you boldly invest in a bright, young company, it’s imperative to have all of your personal debts under control. Debt is generally more expensive to service than the returns that you are likely to get from your investment, so large repayments are likely to undermine your financial goals.
In fact, it is advisable to have some savings in the bank to fall back on. As a general rule, all potentials investors should have a savings account with at least three months salary in it, as this will act as an emergency fund in case of any unforeseen event.
It is also important to get your finances protected, just in case you cannot work due to illness. This means that you should check your sick pay scheme at work to see how long you will be covered for, as well as taking out Critical Illness Cover (especially if you have a mortgage to pay).
Seek Professional Help
Finally, all newbie investors should ask an expert for advice. If you are at all unsure about the risk or suitability of an investment or have a large sum of capital to invest, for instance, an independent financial adviser should be able to narrow the vast choice down for you. But if you would prefer to fly solo, there is loads of investment advice online. So do your homework before spending any of your hard earned cash.
The value of investments can fall as well as rise and any income from them is not guaranteed. You should be prepared to lose your investment. Past performance is not a guide to future performance.