How do I choose?
It’s likely you’ve worked hard for the money you have, so it’s no surprise if you want your money to work hard for you. Investing could be the answer, but the question of where you should put your money is an important one. There’s a lot of choice out there so it helps to approach this decision with a bit of structure. Thinking about these four questions can be a good place to start.
1. How much risk should I take?
All investments come with some degree of risk, that’s just a fact. So if the plans you have for your money mean you can’t afford to or are unwilling to take any risks with it, investing is unlikely to be for you. Investment values go down as well as up and you can get back less than you put in. But the level of risk can vary considerably depending on the type of investments you go for.
As a general rule the more risk you take, the more you might get back. But the flip side is that you also stand a greater chance of losing at least some of your money.
One way to think of it is as a sliding scale. Having some idea of where you’d feel comfortable on a sliding scale helps you narrow down your choices. There’s a standard scale you can use to compare options if you’re investing through a fund (we’ll come back to what a fund is later). It looks like this.
Often, companies that offer funds also have their own way of describing different risk levels for the funds they offer. Effectively their own sliding scale.
How long you’re intending to invest for, and how much money you can afford to lose, are worth thinking about when choosing where you want to be on the risk scale.
If you’ve got many years of investing ahead, you might be less concerned about short-term ups and downs in the value of your investment. That may mean you’re comfortable being higher up the risk scale which could increase your potential for getting more back.
Being lower down the risk scale could reduce that potential, but there’s also less chance of losing money. That would be an important consideration if you’re planning to access your money sooner rather than later, or if losing some or all of it would affect your standard of living.
2. What types of investment are out there?
It’s worth doing a bit of research to understand what is out there and how that relates to the risks you might be comfortable taking. Some of the main options, often called asset classes, include:
A type of loan to a government or company over a fixed period which usually pays out a fixed amount of interest. Most bonds can be bought and sold during the loan period. And if you hold them when the loan is due to be repaid you’ll get back the bonds’ original face value (which could be more or less than you paid for them).
Government bonds (UK ones are known as Gilts) tend to be lower risk than company (or corporate) bonds as governments can usually (but not always) be relied on to repay the debt. But they can also pay a lower interest rate as a result.
Here you are buying a stake in the fortunes of the company that issues them. Like bonds, shares can usually be bought and sold but there is no underlying loan to be repaid. Shares can pay you an income (a dividend) but this isn’t usually guaranteed and can vary from year to year.
Shares can go up and down in value for various reasons, including people’s view of the company’s fortunes and how things like the economy might affect it. Ups and downs can be quite sharp, particularly over the shorter term.
Investing in ‘bricks and mortar’ (or perhaps ‘stainless steel and glass’ these days) is another relatively popular option for investors. This can include a stake in commercial properties like hotels, offices or shopping centres.
Property can generate high returns in the right market conditions but isn’t anywhere near as easily or quickly sold as most bonds or shares. As an individual, a lot can be involved in investing in property and the sums involved can also be large.
3. How involved do I want to be?
It is possible to be very hands-on and choose your own individual investments. For example, choosing specific bonds or company shares and deciding when to buy and sell them. But for most people, especially if you are new to investing, putting your money into a fund is likely to be a more practical option.
In a fund, your money is added together with that of others and – in exchange for a fee - an expert (the fund manager) makes the decisions about where to invest it. Different funds follow different approaches to help you make the most of your money.
Investing through one or more funds can be particularly helpful if you’ve built up a decent savings pot, want to see if you can get better returns for it by investing, but are not sure where to start.
Why use a fund?
There are several reasons it can be worth investing through a fund and paying for the expertise of a fund manager to help make the most of your money. Fund managers:
- have access to professional research teams and large amounts of detailed information
- know how to use this to make decisions about where to invest your money
- help you to spread your risk by putting your money into a range of investments
- can help you to access types of investment that aren’t in the reach of most individuals (for example investing in an office block or shopping centre)
- benefit from economies of scale when it comes to buying and selling investments
Would you have the time, skills and resources to choose and manage your own individual investments as well as an expert could?
4. Do I need a helping hand?
Perhaps the most important thing to remember about investing is that you never have to go it alone. A broad range of information sources and support is available, whether you’re just starting out, or looking to build your knowledge. In some cases, you can use the information to make your own decisions, while others will give you advice and then put it into action on your behalf. What investing could mean for your tax affairs is one area you might want to explore, for example.
You might want to speak to friends or family who are a little more experienced.
Or if you want help to decide, for example how much risk to take or what type of investment might be best for you, then one of the newer online digital advisers may be able to help. You can also speak to a financial adviser about your investment goals and how you might seek to achieve them. Whether going online or speaking to an adviser, you will pay a fee for professional financial advice.