Think About Your Investment Requirements
In the world of investments there are really only two component elements: Money and Time. Money is the obvious pre-requisite, but time is the basic variable which changes and influences investment requirements.
Once annual expenditure has been calculated and the amount available for savings has been calculated, then decisions can be made how the money is going to be invested. For short term objectives the obvious choice is bank and building society deposit accounts. These have short term easy accessibility in terms of making and withdrawing deposits, are considered ‘safe’, due to the FSA’s deposit guarantee scheme, but have low interest returns.
Investment vehicles can be used to produce both income and growth or a mixture of the two, and most people plan their investments based on these particular needs. Others, for example, construct a portfolio based on their tax status at the time as some products are tax- exempt or tax- deferred. All recognise that to allow for capital growth, the investment has to be in place for at least three to five years.
A medium term low risk product is a savings term plan where interest rates are slightly higher than those from easy access accounts.
For a longer term time horizon, there are low risk investments, not directly correlated to the stock market. Such investments take the form of loans to companies and are known as Corporate Bonds and offer returns higher than deposit accounts.
For those prepared to increase risk in return for increased potential growth, investment products with equity content are available, i.e. one which is directly linked to the stock market. Examples include Unit Trust or Investment Bonds. The lower the equity content, the smaller the potential return, but the larger the content, the greater the potential return. However increase in potential also equals increase in volatility. It is really important to understand that with these types of products, there is potential of loss of capital or growth. Therefore the investor must work out what type and level of risk they are prepared to accept. This might include the nature of the equities themselves and the stability of the industries they invest in. In addition the investor might even want to consider if the industries themselves, such as those dealing in tobacco or arms, fit in with a personal moral code.
Risk can be decreased by diversifying holdings by sector and asset class. It is really all about how much individuals can afford to lose and still be able to maintain their lifestyle at the time: When in your twenties and thirties you might not be able to tie your money up in this way, as this is a time in your life when you usually have financial commitments based on your family’s needs. On the other hand, you might be expecting an inheritance in the future and as such be prepared to take risks now, with the benefit of this future cushion. As your career progresses and the family become less dependent, you might be in a position to invest long term in growth assets such as property and equity funds. However when you are older, although you might have fewer obligations, you are probably less interested in volatility and risk, because there is less time for your investments to recover if you suffer a loss. Your need for income is greater and you might consider returning to cash based investments.
Given that everyone’s financial commitments change over time, as do the financial markets themselves, it makes sense to review financial portfolios, including expenditure, savings and expenditure on a regular basis, to ensure current and future needs are being met.
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