Knowing yourself, your needs and goals, and your appetite for risk is essential when looking for tailored investment advice.
1. Consider your reasons for investing
It is important to know why you are investing. The first step is to consider your financial situation and your reasons for investing.
For example, you might be:
- Looking for a way to get higher returns than on your cash savings
- Putting money aside to help pay for a specific goal such as your children’s or grandchildren’s education or their future wedding
- Planning for your retirement
Determining your reasons for investing now will help you work out your investment goals and influence how you manage your investments in future.
2. Decide on how long you can invest
If you are investing with a goal in mind, you have probably got a date in mind too. If you have got a few goals, some may be further away in time than others, so you’ll probably have different strategies for your different investments.
Investments rise and fall in value, so it is sensible to use cash savings for your short-term goals and invest for your longer-term goals.
Most investments need at least a five-year commitment, but there are other options if you don’t want to invest for this long, such as cash savings.
If you can commit your money for at least five years, a selection of investments might suit you. Your investments make up your portfolio and could contain a mix of funds investing in shares, bonds and other assets, or a mixture of these.
Let us say you start investing for your retirement when you are fairly young. You might have 20 or 30 years before you need to start drawing money from your investments. With time on your side, you might consider higher-risk fund exposure that can offer the chance of higher returns in exchange for an increased risk of losing your money.
As you get closer to retirement, you might sell off some of these riskier investments and move to safer options with the aim of protecting your investments and their returns.
How much time you have got to work with will have a big impact on the decisions you make. As a general rule, the longer you hold investments, the better the chance they will outperform cash – but there can never be a guarantee of this.
3. Make an investment plan
Once you are clear on your needs and goals, and you have assessed how much risk you can take, next you need to identify the types of investment options that could be suitable for you.
4. Build a diversified portfolio
Holding a balanced, diversified portfolio with a mix of investments can help protect it from the ups and downs of the market. Different types of investments perform well under different economic conditions. By diversifying your portfolio, you can aim to make these differences in performance work for you.
You can diversify your portfolio in a few different ways through funds that invest across:
- Different types of investments
- Different countries and markets
- Different types of industries and companies
A diversified portfolio is likely to include a wide mix of investment types, markets, and industries. How much you invest in each is called your asset allocation.
5. Make the most of tax allowances
As well as deciding what to invest in, think about how you will hold your investments. Some types of tax-efficient account mean you can normally keep more of the returns you make. It is always worth thinking about whether you’re making the most of your tax allowances too.
You need always to bear in mind that these tax rules can change at any time, and the value of any particular tax treatment to you will depend on your individual circumstances.
6. Review portfolios periodically
Periodically, a financial review will provide the opportunity to check and see if your portfolio/s wide mix of investment types and markets still aligns with your goals.
These are some aspects of your portfolio you may want to check up on annually:
- Changes to your financial goals – Has something happened in your life that calls for a fundamental change to your financial plan? Maybe a change in circumstances has changed your time horizon or the amount of risk you’re willing to handle. If so, it is important to take a hard look at your portfolio to determine whether it aligns with your revised financial goals.
- Asset allocation – An important part of investment planning is setting an asset allocation that you feel comfortable with. Although your portfolio may have been in line with your desired asset allocation at the beginning of the year, depending on the performance of your portfolio, your asset allocation may have changed over the period in question. If your actual allocations are outside of your targets, then perhaps it is time to readjust your portfolio to get it back in line with your original targets.
- Diversification – Along with a portfolio with a proper asset class balance, you will want to ensure that you are properly diversified inside each asset class. Diversification means owning a variety of assets that perform differently over time, but not too much of any one investment or type. There are four main asset classes – cash, fixed-interest securities, equities and property– and having exposure to them all will help reduce the overall level of risk of your investment portfolio. If one part of your portfolio is not doing well, the other investments you have made elsewhere should compensate for any market corrections.
- Performance – Consider if there are certain aspects of your portfolio that need rebalancing. You may also want to consider selling to help offset capital gains you might make throughout the year. The primary goal of a rebalancing strategy is to minimise risk relative to a target asset allocation, rather than to maximise returns. Over time, asset classes produce different returns that can change the portfolio’s asset allocation. To recapture the portfolio’s original risk-and-return characteristics, the portfolio should therefore be rebalanced.
- Market timing
- Minimising risk
- Multiple asset classes
- Portfolio insulation
- Pound cost averaging
- Principles of investing
- Children’s pensions
- Defined benefit (or final salary) pensions
- Defined contribution pensions
- Personal pensions
- Self-Invested Personal Pensions (SIPPs)
- The state pension
- Annual allowance and lifetime allowance limits
- Busting myths about pensions
- Increases to pension age and new normal minimum pension age
- Pension freedoms
- Pension withdrawal methods
- The lifetime allowance
- Delaying retirement
- Generating income from investments throughout your retirement years
- Importance of a retirement wealth check
- Retirement goal setting
- Retirement planning
- Reviewing your retirement plan
- Staggered retirement
- Taking control of your retirement plans
- What can I do with my pension?
- What happens to my pension on death?
Growing your wealth
Goals based investing
- Cash flow modelling
- Creating a financial roadmap
- Investment objectives
- Timescales and market activity and the impact of losses
- ‘What if’ scenarios
- Discussing legacy planning with your loved ones
- Inheritance Tax (IHT)
- Inheritance Tax Residence Nil Rate Band (RNRB)
- Lasting power of attorney
- Lifetime transfers
- Making a Will
- Preserving wealth for future generations
- Protecting your assets for the next generation
- Slicing up your wealth pie