Most of us think about our financial security – having more money now and for the future.
We can do this by spending less, working harder or making our money work harder for us. The latter seems to be the obvious choice and the way to do that is by investing it.
Investments also benefit from what Albert Einstein called ‘the greatest mathematical discovery of all time’, namely compound interest, as long as you re-invest what you make. We’ve all heard it before but it’s true, the more time you give your investments, the more potential your investment has to grow. Simply put, it’s the snow ball effect.
s. Stocks, bonds, mutual funds all sound so complicated and confusing. Fear not, here are some basic rules for investing for your future.However, the very word ‘investing’ brings most of us out in hive
When thinking about investing, the simple mnemonic TRAIT is really helpful.
Where you are in life? Are you just starting out or close to retiring? The answer to this will impact how you invest. Generally, the shorter your time horizon, the more conservative you should be. If you are thinking about investing for your retirement and you are still in your 20s, you have time on your side. You can ride out the storms of market volatility and really make use of compound interest.
On the other hand, if you are about to retire, you will want to preserve your investments, not expose it to anything too volatile and risky.
Your risk tolerance is all about how willing you are to deal with swings in the value of your investments. Fixed-income securities, commonly known as bonds, are generally low risk whereas stocks, also known as equities, tend to be much higher risk.
While none of us have a crystal ball to see into the future, it is important to consider what, if any, access you will need to money you invest. This will determine your investment choice.
There are three main types of assets: fixed interest (bonds), equity (stocks) and property.
When you buy bonds, you are effectively lending money to a company or government. In return, you expect to see a return of your investment plus interest. As a rule of thumb, the lower the interest is, the lower the risk is.
In terms of stocks, you are buying part of a company. This is with the view that the company will grow its profits and your shares will see an increase in value. Buying stock in a well-established company is less risky than buying stock in a start-up.
A mutual fund is a mix of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind. The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. Theoretically, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself.
You can also invest in property through a property fund, which mostly buys commercial property. The fund earns rent from tenants and properties may also gain in value over time. The level of risk varies depending on how, if at all, the property fund borrows, something common in investment trusts.
To manage your exposure, it is best to spread the investment risk by investing is different types of assets (bonds, property and equity). This applies across geography too. For example, think about having some of your investments Europe, the US and the Far East and not just in the UK.
Always remember though that with investments, the value and income you get from them can go down as well as up.
Tax: while this is not about the tail wagging the dog, ISAs and pensions are great tax-efficient investments. And if you do nothing else, then at least make use of your tax-free allowances.
So now you have the basic rules of investing, which gives you a peek behind the smoke and mirrors world of investing. In reality, a common sense approach, not putting your eggs into one basket and getting professional advice will allow you to make your hard earned money work harder for you as well as enjoy the finer things in life.
(The information in this article is for general use and is not meant to be taken as personalised advice.)
About the author – Gemma Stanbridge:
Gemma has been advising a broad range of loyal clients, including professionals, entrepreneurs and retirees, for almost a decade. She prides herself on the long-term relationships she has built over the years, which allows her to help clients meet their financial goals throughout the different stages of their lives.
While Gemma provides a range of financial services to help clients grow their wealth and assets, she specialises in retirement planning and inheritance tax. Most people do little or no planning in this regard. Recognising this, particularly for inheritance tax, Gemma heads up a team at Westminster Wealth Management that focuses specifically on this area of financial planning. Clients are able to plan for retirement and mitigate inheritance tax liability in a controlled, flexible and effective way while maintaining their quality of life.
At the same time, Gemma is increasingly sought after by international clients for advice on financial planning and pensions. This includes:
- Advising UK citizens with US connections and/or legacy assets.
- Advising current UK residents with US tax reporting requirements.
- Repatriation of pension assets, in particular for clients returning to Australia and New Zealand.
Gemma is a fellow of the Personal Finance Society, the highest qualification a financial adviser can hold, and an affiliate of the Society of Trust and Estate Practitioners. In 2015, she received WATC’s Rising Star award for Investment Manager of the Year. This recognises individuals who are seen as having the potential to become a future leader in their industry and who strive for results.
Prior to joining Westminster Wealth Management, Gemma worked for an NGO in Cameroon. She is a keen sports woman and participates in a multitude of sports including water-skiing, open water swimming, triathlons, tennis, horse-riding and wind-surfing. She is currently training for her third half iron-man and would like one day to trek to the North Pole.