Common investing questions, answered
Investing is for everyone. It is a core part of any financial plan, helping you build wealth and move towards your long-term goals. Yet, the subject can be confusing – even for seasoned investors who may encounter concepts and jargon they are unfamiliar with.
To help you gain knowledge and confidence, we have compiled a list of commonly asked questions about investing that our Grantham financial planners receive. We hope our answers provide more clarity and confidence as you consider your portfolio.
What is investing, exactly?
Investing is buying an “asset” to gain a profitable return.
This helps to distinguish it from saving, which is a way of storing (not spending) money until you need it. Investing puts your money to work.
An “asset” is something that can retain (and increase) value, with the option to turn it into cash. Examples include shares, bonds and property.
Is investing right for me?
Investing is not just for the “rich”. Today, technology has opened up more doors for almost everyone to start investing if they want to.
When you invest, you build more financial freedom as you progress through life. Perhaps you could retire early, set up your own business or work remotely whilst travelling the world.
Investing is arguably less of a priority if you have expensive debts (e.g. unpaid credit cards). The interest from these liabilities will almost certainly be higher than any returns you can realistically hope to achieve from investing.
However, assuming you have a healthy balance of assets to liabilities (and a decent emergency fund – e.g. 3-6 months’ worth of living costs in savings), investing will almost certainly be worthwhile.
How should I start investing?
Before committing any money to assets, it is crucial to examine your goals.
What do you want your investments to “do”? For instance, some people might want to build a nest egg for retirement over the next 20-30 years. Others might have a shorter-term goal, such as building a first mortgage deposit.
Certain individuals might be focused on wealth accumulation—i.e., maximising growth. Others, such as those nearing retirement, may be focused on gaining income from their investments.
Working with a financial adviser can help you work through these matters more carefully. Depending on your situation, goals, and risk tolerance, you may require a different investment approach from others you know (e.g., family members).
How much should I invest?
This depends on your goals, values and circumstances.
For many people, affordability is the crucial factor. If your finances are currently fragile or unstable, it is more important to ensure a strong emergency fund to minimise your likelihood of turning to credit.
A good rule of thumb is to commit 10-20% of your income towards saving or investing. Certain people may need to contribute more. For instance, if you are nearing retirement age and have yet to build a strong pension, this may require a more aggressive strategy.
For some, even 10% is a big step. In this case, try to start small – e.g. with £50 per month. As you grow in discipline, examine your budget and try to increase it by £5-10 monthly.
What are the best investments?
Many people fall prey to investment scams which offer outlandish promises. When considering different options, it is important to remember some time-honoured principles.
Firstly, be careful not to invest in something you do not understand. You do not need to be an investing expert before starting your portfolio. However, if you do not know what an “ETF” is, then you should ensure you understand how it works before committing money.
Secondly, most investors will likely suit some mixture of the “traditional” asset classes – i.e. shares, bonds and property. The precise “asset allocation” you take will depend on unique variables, such as:
- Your time horizon (when will you need the money?)
- Your risk appetite
- Your capacity to accept losses (i.e. how much could you afford to lose before impacting your lifestyle?)
- Your values (e.g. ethical considerations)
- Your goals (e.g. wealth growth vs. income)
A financial adviser can help you build a suitable portfolio and work through these areas together.
How do I manage risk?
There is no “ideal” risk tolerance for investors. What matters is that you are honest with yourself about your own risk profile.
One way to manage risk is to ask yourself targeted questions. For instance: “If I woke up tomorrow and my investments had fallen by 20% overnight, how would I react?”
If you know that you would face a strong urge to “panic sell” your investments, or your lifestyle would be unsustainable, then a more “cautious” strategy might be appropriate.
This leads to a second way to manage risk: asset allocation. Certain assets tend to be “riskier” than others. In particular, shares usually offer higher long-term returns than bonds, albeit at a higher risk. So, someone with a “cautious” investment approach may wish to allocate more of their portfolio to bonds. A more “aggressive” investor, by contrast, will probably want to focus on shares.
What is diversification?
Diversification builds on the above idea of asset allocation. It helps to manage risks and maximise potential returns by “spreading out” your investments.
This can be achieved in at least two ways:
- Intra-asset diversification. For example, if you focus your portfolio on the “shares” asset class, it is good practice to spread out your investments across multiple shares – e.g. in different markets, sectors and business stages.
- Cross-asset diversification. This is when you spread out your money across multiple asset classes to mitigate some of the risks associated with each one.
Please note: when investing your capital is at risk. The value of your investments can go up and down, and capital losses can occur at any time. Past performance is no guarantee of future performance.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
