Below are three things, you should always consider, during the investment process:
- Firstly before you invest you should ensure that you have sufficient capital elsewhere to meet any short term needs such as an emergency. You should not invest all of your available capital, as this would leave you in a situation where you may have to encash part of an investment earlier than planned to pay any unforeseen expenses. By being forced to sell units at an inopportune time, you may make unnecessary losses.
- You must consider the time frame over which you wish to invest. A shorter time frame, will generally mean you have a lower risk tolerance than if you invested with a similar capacity to loss over a longer term. This is because, whilst a reduction in the value of your investments will always be unwelcome, you may be prepared to consider investments that may fall in the short term but which may have the possibility of better growth over the longer term. Conversely, if you have a shorter term perspective, perhaps you plan to retire within 5 years, you may need to encash your investments sooner. This could be at a time when there has been a fall in value and there would be no possibility of remaining invested whilst your holdings recover. This would mean you wish to take less risk. You may of course, take different approaches, to different portions of your money.
- It’s very important to remember the effect inflation will have on eroding the value of your capital over time. As a general rule, an inflation rate of 5% per year, over 10 years, will reduce the real value of your money by 40%. In other words, choosing not to invest your money, carries its own risks.
The Value of advice
“To err is human” said Alexander Pope – but with investments, to err is expensive. What you can do however, is look at the mistakes of others and try to avoid the most obvious pitfalls.
Investors can make many mistakes but one of the most common is to follow the herd.
When markets are high they often scramble to invest thinking they might miss out. Then when markets are falling they often sell.
The most recent example of both was the ‘dot.com’ boom. This persuaded millions of investors to part with their savings thinking they were missing out on a chance to make ‘easy’ money. Unsurprisingly, the bubble burst and many scrambled to get out without a thought about what might happen next.
The lesson is not to get carried away in the moment – either to invest or to sell.
Stories of large falls in markets can make investors nervous, but this is in the nature of equity investments and selling on a short-term dip simply crystallises a loss and can also mean missing out on both the eventual return to normality and a possible longer-term rise.
Markets will always go down as well as up – so if you are scared by such volatility then investing without advice may not be for you.
Some investors believe, often based on little more than the weekend news, that they can predict the market, selling high and buying low. Experts agree this is almost impossible.
Investment should never be entered into lightly and you should be clear about your objectives, your timelines and the risks. Take our advice and we will make every effort to ensure your portfolio is invested according to your wishes and plans.
Where can you invest?
There are 4 main areas in which you can invest, as shown below:
This includes bank and building society deposits, but also other investments, such as money market instruments. The risk of falls in value is normally low, but the risk of not keeping pace with inflation over the longer term is much higher, especially in times of low interest rates.
The graph shows average returns in this sector, against in ation, over 10 years.
There are two main types you will come across, government and corporate bonds. These will normally offer a fixed return over a period of time in return for a loan to an investor. The capital is then usually returned at the end of the term. However the capital value and level of income, are directly related to the financial stability and strength of the underlying company. As with most investments, more risk often means more potential return. But on the other hand, these kind of investments are particularly sensitive to increases in interest rates or in ation, either of which will usually cause the value to fall.
Government bonds or Gilts, are normally considered the least risky, as the likelihood of the UK Government defaulting is comparatively low. Corporate bonds are usually seen as more risky, as a company may not be able to pay interest or capital payments if it is struggling financially.
Generally the more risky companies will need to pay a higher level of income, to compensate investors for the extra risk taken.
The graph below, shows some historic returns, you will notice the graph is more volatile than the cash graph.
These are shares in the ownership of companies, the value of which is normally directly related to the success of the company. Whilst these investments are usually higher risk than bonds, they have historically provided better returns over the medium and long term, although this is not guaranteed to continue in the future. There may be periods where your investments fall signi cantly in value, if you invest in equities.Buying shares in companies based in certain countries, such as emerging markets, is more risky than if you were to invest in a more developed area, such as the UK. The graph below shows the FTSE All-Share Index, over 10 years.
A diversified commercial property investment, will usually be less volatile, than an equity based investment. Commercial property cannot always be sold at short notice. As a result, investors may be subject to delays, when withdrawing their money.
The graph below shows the IPD UK All Property Monthly Index, over the last 10 years.