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Congratulations on deciding to invest, but there are several basic principles that you’ll need to get to grips with first. This guide will help you to start on the road towards successful investing.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.
There are six things you need to be certain about before you invest your money:
- How much you are happy to commit
- The money isn’t needed elsewhere
- You can afford to tie this money up for a long term period
- You are prepared to accept the risk of loss as you could get back less than the sum you invest.
- You are sure of your investment goals and what you want to achieve.
- You have a long- term mindset and you’ve considered a long-term approach to investing.
• Define your investment goals
It’s vital to establish your investment objectives at the outset. Begin by asking yourself what you are investing for and how you plan to spend any returns and gains.
You might be investing to fund a number of goals, for example, to contribute to school fees or university costs, and to help cover your own retirement costs later on.
Your investment horizon will be mapped out according to these financial goals. Investing towards retirement will mean you are in this for the long term, and could be investing over several decades. Investing to cover your children’s education costs may mean you require funds sooner, perhaps in the next 10 years, depending on their age. If you’re investing to build an extension on the back of the house then you’ll probably be looking at the shortest term possible.
• Don’t invest money you may need to use soon
Money that you put aside for investments has to be money that you know you won’t need for a number of years. It is essential that alongside your investment pot should be an emergency cash fund. This rainy day money will bring you peace of mind that if you need funds in a hurry, you will have them at your disposal. Having this emergency fund available reduces the temptation to sell longer term investments ahead of a recovery which may be just around the corner.
• Put your money to work and give it time to grow
The main reason for investments is the potential to earn higher returns.
With this potential comes greater risk, so you must be prepared for the fact that there are no guarantees you will get a higher return or even get back what you invested.
A key point to remember is that investments need time to grow. That’s why a long-term approach is essential. The longer you are able to leave your money, the more likely you are to make a profit.
• Top up with regular contributions as soon as possible
You don’t necessarily need a big lump sum to start investing. You can make regular monthly contributions if you prefer.
Don’t be discouraged if what you can first afford to put aside on a regular basis seems like a small sum. It’s as much about getting into the habit of putting investment money aside as much as anything else.
Cultivating the habit of financial discipline is important, so if you can manage the little funds you have, you’ll do better when the big bucks starts rolling in. You can use opportunities such as salary increases, bonuses, household savings, family gifts and second sources of income to boost your regular investment payments.
The good news for regular contributors is that you get to utilise the dollar cost averaging method by drip-feeding money into your investment account and this might buy you more shares in the long run than a lump sum. This is because when markets are falling you buy more shares as prices are low. However, the reverse is also true, so you buy less shares when prices are high.
• Get the best out of your pensions
Retirement planning is an essential task for all investors. Pensions are complex and it is easy to get confused by the rules and regulations of the many different types. New rules now give investors far more choice and freedom with the way they choose to invest for, and in due course take, a retirement income. All of which makes it more important than ever that before you move a pension or set up a new pension, as part of your investment planning process, you talk over all the available options with a professional financial adviser.
• Watch out for changes in tax rules
It’s important to bear in mind tax rules may change in the future and the value to you of any favourable tax treatment will depend on your individual circumstances.
All investments carry a risk of loss of capital which means you might get back less than you invest.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing seek professional advice.