Top tips
for choosing investments
Use these tips and key steps to help find an investment
that’s right for you.
1. Review your needs and goals
It’s well worth taking the time to think about what you
really want from your investments. Knowing yourself, your needs and goals and your
appetite for risk is a good start, so start by filling in a money fact find.
2. Consider how long you can invest
Think about how soon you need to get your money back. Time
frames vary for different goals and will affect the type of risks you can take
on. For example:
Ø
If you’re saving for a house deposit and hoping
to buy in a couple of years, investments such as shares or funds will not be
suitable because their value goes up or down. Stick to cash savings accounts
like Cash ISAs.
Ø
If you’re saving for your pension in 25 years’
time, you can ignore short-term falls in the value of your investments and
focus on the long term. Over the long term, investments other than cash savings
accounts tend to give you a better chance of beating inflation and reaching
your pension goal.
3. Make an investment plan
Once you’re clear on your needs and goals – and have
assessed how much risk you can take – draw up an investment plan. This will
help you identify the types of product that could be suitable for you.
A good rule of thumb is to start with low risk investments
such as Cash ISAs. Then, add medium-risk investments like unit trusts if you’re
happy to accept higher volatility. Only consider higher risk investments once
you’ve built up low and medium-risk investments. Even then, only do so if you
are willing to accept the risk of losing the money you put into them.
4. Diversify!
It’s a basic rule of investing that to improve your chance
of a better return you have to accept more risk. But you can manage and improve
the balance between risk and return by spreading your money across different
investment types and sectors whose prices don’t necessarily move in the same
direction – this is called diversifying. It can help you smooth out the returns
while still achieving growth, and reduce the overall risk in your portfolio.
5. Decide how hands-on to be
Investing can take up
as much or as little of your time as you’d like:
Ø
If you want to be hands-on and enjoy making
investment decisions, you might want to consider buying individual shares – but
make sure you understand the risks.
Ø
If you don’t have the time or inclination to be
hands-on – or if you only have a small amount of money to invest – then a
popular choice is investment funds, such as unit trusts and Open Ended
Investment Companies (OEICs). With these, your money is pooled with that of
lots of other investors and used to buy a wide spread of investments.
Ø
If you’re unsure about the types of investment
you need, or which investment funds to choose, get financial advice.
6. Check the charges
If you buy investments, like individual shares, direct, you
will need to use a stockbroking service and pay dealing charges. If you decide
on investment funds, there are charges, for example to pay the fund manager.
And, if you get financial advice, you will pay the adviser for this.
Whether you’re looking at stockbrokers, investment funds or
advisers, the charges vary from one firm to another. Ask any firm to explain
all their charges so you know what you will pay, before committing your money.
While higher charges can sometimes mean better quality, always ask yourself if
what you’re being charged is reasonable and if you can get similar quality and
pay less elsewhere.
7. Investments to avoid
Avoid high-risk products unless you fully understand their
specific risks and are happy to take them on. Only consider higher risk
products once you’ve built up money in low and medium-risk investments.
And some investments are usually best avoided altogether.
8. Review periodically – but don’t
‘stock-watch’
Regular reviews – say, once a year – will ensure that you
keep track of how your investments are performing and adjust your savings as
necessary to reach your goal. You will get regular statements to help you do
this. Find out more below.
However, don’t be tempted to act every time prices move in
an unexpected direction. Markets rise and fall all the time and, if you are a
long-term investor, you can just ride out these fluctuations.
REFERENCE:
https://www.moneyadviceservice.org.uk/en/articles/top-tips-for-choosing-investments
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