Investments / Savings
Every day newspapers are full of advertisements trying to persuade you to invest in:
- stocks and shares
- unit and investment trusts
- Individual Savings Accounts
- bank and building society deposit accounts
- National Savings
- unit and investment trusts
How do you decide which savings plan or investment is best for you?
Building your own individual investment strategy is not easy. There are a small number of basic investments but they can be wrapped up inside many different products. For example stocks and shares can be either bought directly or "wrapped" in, for example, an individual savings account (ISA), a unit trust or a pension scheme. So investors both large and small are now faced with a myriad of options. How should you go about deciding the best strategy for investing your money?
We at Simpliindependent can help you with:
- Your priorities for spending and saving now and in the future
- take stock of your long term aims and what effect they may have on your financial situation
- look at how realistic those aspirations are
The choice of underlying basic investment and its wrapper are largely a function of how long it will be before you need to draw on those particular savings.
When planning ahead remember to take into account the rate of inflation. Even if inflation stays at a low level, it can take its toll over the years.
It may not be possible to do everything that you want. You have to set priorities, which will vary from individual to individual. If your burning desire is to own the most prestigious property, then your priorities are going to be different from someone who wants to retire as early as possible. Alternatively, your main priority may be to downsize as soon as possible and move your family to the country and cleaner air.
Emergency funds
There is little point in tying up money for the longer term in high-performing investments if your short-term needs are not met. You must always keep a balance in your portfolio and make sure that you have sufficient short-term, medium-term and long-term reserves. For most people an emergency fund will comprise "car and roof" money.
Typically three months' net income tucked away somewhere safe in a deposit account should suffice.
Buying a home
This may be your biggest commitment and, with your pension, perhaps your main long-term investment. It is quite usual to borrow money in the form of a mortgage for your home, and for that loan to last 20 or even 30 years. Make sure you choose a mortgage that is right for you and you should consider your home in investment terms as well as in terms of its suitability as a place to live. Simplicity Financial Services Lt can help you with all your mortgage requirements, call 0114 250 6161 to quote.
Retirement
Paradoxically, the best time to think about retirement is when it is probably the last thing on your mind, that is, as soon as you start work. With retirement planning, you can never start too early. If you provide your own pension, up to 20% of your income will need to be set aside over a 30-year period to achieve a pension comparable to that from a good company pension scheme. The state pension won't provide sufficient income for the majority of people so you must take the initiative yourself.
If you are fortunate enough to have a company pension plan, then this will help. If you rely on your own resources because you are self-employed or there is no employer scheme, then you should start to think about pensions sooner and take them very seriously. We can offer all types of pensions to suit your needs, from individual pensions to large company schemes.
Having a family
This is probably the single most dramatic change in a person's life. For both mother and father there is a shift in personal emphasis and, for the next 15 to 20 years, they will take on responsibility for the welfare of their children. Those who have dismissed the thought of life assurance before will now probably be keen to protect their children. Often, a bigger house is required. You may need to consider school and university fees, in addition to the gradual but nevertheless significant increase in regular outgoings, for example nappies, toys, food, and clothes.
Tax planning
Consideration of the tax implications of your investments should go hand in hand with your investment strategy. At the same time, it is never sensible to let the tax position dominate your decisions. Some investments enable you to defer tax until your taxation rate is reduced, such as at retirement. Others enable substantial amounts of money to be sheltered from tax. Some wrappers for your basic investments give tax advantages but may also lock in your savings for longer than you wish.
Tying your money up
Make sure you are sensible about how long you want to lock your money away for. As a general rule, those investment products that tie up your funds in a wrapper for a fixed term, or have longer notice periods for withdrawal, offer better rates of return. They might also impose penalties if you take your money out early. Other investments, such as those linked with the stock market, are designed to be long-term investments. You would be unwise to use long-term investments for short-term funds in case you were forced to sell them at a time when the market was depressed. A good strategy is to set some money aside for short-term expenses, estimate when you may need a large sum of money in the future (for example, for holidays, a wedding or a deposit for a house) and then put some money aside for a longer period.
Choosing between regular savings or lump sum investments
Some investments are more appropriate for people with large amounts of money, while others are designed especially for smaller investors. If you only have a modest amount of money to invest, you may not want to risk putting all your money in one place, or investing in one company. There is a wide range of unit trust funds, which wrap up your basic stocks and shares to enable you to share in a professionally managed portfolio of stocks and shares. If you have already built up a cash sum, you will be looking for a lump-sum investment, such as a bond, a unit trust or shares. Alternatively, you can start a regular savings scheme, where you can put aside some of your earnings each month to build up a lump sum for the future.
Business Funds
It may be that you want to set up your own business in the future, either as a sole trader or in partnership. Although borrowing for business purposes does have tax advantages, it is almost invariably true that the less you need to borrow, the better it will be. This is particularly important for cash flow with a business. Make sure you set aside money in suitable investments that will mature at the time you require them.
Ethical investment
If you are considering stock market investment, even if it is through a unit trust or investment trust, you may wish to choose, or indeed eliminate, certain types of company. Ethical and environmental funds are gaining in popularity as more and more investors are choosing to boycott those companies engaged in the exploitation of people or damage to the environment. These funds can perform as well as traditional investments, given time, and depending on the underlying investments.
Keeping up with inflation
In the last few years, we have come to expect rather lower levels of inflation than we experienced during the 1970s and early 1980s. Remember that at 5% per annum, inflation can reduce £1,000 to a mere £377 in 20 years. Traditionally, stock market investment has kept up better with inflation than say a bank or building society account, but investment in equities has its ups and downs, and there is an increased risk of losing your money.
Risk
It is essential that you take risk into account with any investment that you make. At one extreme there are no risks to be taken with placing your money in deposit accounts offered by banks and building societies. At the other end you can gamble a lot of money on high-risk ventures which offer no safety net.
Most people choose to invest in a balanced investment somewhere in the middle. If this is the case, then it is important to ensure that the risk on your investments is spread. Thus you will have some low-risk, some middle-risk and some higher-risk investments. This is perfectly all right providing you do not intend the more volatile investments to be realised in the short-term.
Some investors may feel that investing in deposits is risk free. However, this does not take into account the effects of inflation and the long-term benefits of investing in the stock market. Indeed, putting all your money in deposit could be viewed as the riskiest strategy!
Striking a balance
You will also need to decide whether you need income from your investments now (bearing in mind your tax position), or whether you are wiser to invest for capital growth and readjust your investments later to supplement your income. There is a huge range of investment products to suit any circumstances. A good independent financial adviser can give you more guidance on this when you have explained your personal situation.
Review your strategy regularly. What represents good value today may be quite different in the future. Tax legislation may have changed, interest rates will fluctuate, and the economic fortunes of companies and markets will alter, to say nothing of your changing circumstances. It is best to review your investment strategy at least once a year.
Simpli Independent are experts in all the areas mentioned above, we can talk you through your options and help you decide on the best steps forward. Simply call us to arrange a free appointment 0845 688 6168.
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