In the wake of the Woodford debacle, there’s a lot of buzz around investments and the rationale for choosing them. So we thought it would be useful to outline what you should be thinking about when it comes to choosing an investment to enable you to get the best outcomes for your money.
Review your goals
It sounds obvious, but taking the time to think about what you want from your investments is key to selecting the correct fund for you. Writing down your needs, your goals and how much risk you may be prepared to take is a good starting point.
Consider your investment’s lifespan
How soon will you need your money back? Timeframes will vary between goals and will affect the level of risk you are prepared to take. For example:
- If you’re saving for a pension to be accessed in 30 years’ time, you can ignore short-term falls in the value of your investments and focus on the long term. Over longer periods, investments other than cash savings accounts tend to deliver a better chance of beating inflation.
- If your goals are shorter term, i.e saving for a big trip in a couple of years, investments such as shares and funds might not be suitable as their value can fluctuate, so it may be best to stick to cash savings accounts.
Make a plan
Once you’ve identified your needs, goals and risk levels, developing an investment plan can help you to find the sort of product that’s best for you. Low risk investments such as Cash ISAs are a good place to start. After that, it’s worth adding some medium-risk investments such as unit trusts if you’re comfortable with higher volatility.
Adding higher risk investments is something you’ll only really want to approach once you’ve built up a few low to medium-risk products. However you should only do so if you’re willing to accept the risk of losing some or all of the money you put into them.
Diversify, diversify, diversify
You’ve probably heard it before, but diversifying is a key part of investment planning. It’s a basic rule that to improve your chances of better returns, you have to accept more risk. Diversification is an excellent method that improves the balance between risk and return by spreading your money across different investment types and sectors.
Avoid high risks
As mentioned above, it’s best to avoid high-risk investments unless you’re willing to accept the chance that you might not see any returns or even lose your investment. Adverts that proclaim to offer high levels of return will rarely come without risk and we’d urge caution before investing in anything that you’re not 100% certain about. If you do decide to pursue a high-risk product, it’s vital to make sure you fully understand the specific risks involved.
With all investments comes a degree of risk, and returns can never be wholly guaranteed. Of course, we would always advise talking to an independent financial adviser.