Before you start throwing your life savings into various risky investments you need to understand some of the issues involved in investing for the future.
Here are my top tips for the first time investor.
1. Decide your investment goals
You need to decide what you are trying to achieve with your investments. Are you just trying to get a better return than money left in the bank , aiming to achieve certain amount of money for some future purchase or do you have the need to provide an income. Knowing what you want to achieve with your investment will affect other decisions you will need to make about where to put your money.
2. Understand your timescales
How long do you want to leave your money invested will be a deciding factor on where you should place your investment. With a short time frame you will need to consider investment with easy access and a higher level of security. If you have a timescale of less than 5 years before you need access to your capital then you would be well advised to keep your money in cash. If you have a longer timeframe (5-10 years) then you can afford to take more risk, allowing time for recovery if investment values take a setback.
3. Understand your attitude to risk
One of the most important elements in investing is your attitude to risk, generally the greater potential reward the higher the risk. Your attitude to risk will vary through your lifetime and and how long you can stay invested. Generally speaking the younger you are the greater level of risk you can take, as their is plenty of time for your investment to ride out the ups and downs of returns. The nearer you are to retirement then the more cautious you tend to become as you seek to protest your assets for use in retirement.
4. Making regular investments or a lump sum
Making a regular investment makes the issue of timing the markets less important, read this article for a better understanding of this point - The benefits of pound cost averaging and phased investing. A lump sum investment, on the other hand, requires an element of timing to make sure you are not buying at the top of the market, although trying to guess where the market is going is a very difficult task.
5. Make sure you use your tax allowances
It makes no sense to not use your annual ISA allowance, which means that all your investment gains are free of tax. You may also consider pension investments which again have got very attractive tax benefits.
6. Diversify your investments
Basically this means don't put all your eggs in one basket. Spreading you investment across different areas will give a more balanced portfolio and less chance of loss of capital.
7. Keep an eye on the costs
There are costs concerned with most types of investments and these can make a substantial difference to your investment returns over time. Make sure you check out the costs involved before you make any investment, these costs must be shown within the investment documentation or on the company website. If you decide to use investment funds in your portfolio then here is a handy calculator that will give you an idea of how charges will affect your investment results over time True and Fair Calculator.
Now put the above into practice
Once you have understood the above points you can start investigating the investments that fit your criteria. There are various options open to you and I would always recommend seeking the advice of a financial adviser. Also, it will be well worth you reading this article - How to be a DIY investor if you fancy going it alone.
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