With interest rates sitting at a long-term low for the last few years, and then catapulted into unpredictability with the market chaos of September 2022, it’s not surprising that many of us are looking at alternative options for our money when it comes to savings. Investment is one of those options – but is it right for you, and what are the risks? Here are some questions to consider when deciding where to put your money.
Should I have other priorities for the money I have to invest?
Before you invest, we’d always recommend paying off significant debts first – especially high-interest ones, such as payday loans, credit cards and overdrafts. It’s highly likely that the return on any investment will be smaller than the interest you’ll be racking up on those debts over the long term, so you’ll be much better off paying the debt first.
Mortgages are a slightly different matter, as the interest rates on those in recent years have been lower than those on these other debts (rate rises since Sept 2022 aside). Everyone’s mortgage position is different, and it could be in your favour to pay off your mortgage earlier with overpayments rather than investing that money elsewhere – but equally, the return on your investment could be significantly higher than the amount you would save by paying off your mortgate. Taking advice on your particular circumstances here is always a good idea.
Do I have enough money to invest?
Sudden unemployment, illness or a big structural fix for your home – these unexpected events can happen to anyone. If you’ve tied up all your spare cash in investments, and then find you need to get your hands on it, you’ll either have to do one of two things: cash in the investment early, before it’s achieved the value you wanted; or take out a loan / rely on your overdraft (which could cost you more than your investment is making you).
We’d recommend working out how much money you would need for six months’ worth of living without an income, and then keep that aside in an easy-access savings account, so you can get hold of it if you need to. Then you can invest what’s left over – and it doesn’t have to be as much as you think.
Many people believe that you need to be a millionaire to have investments – and that’s not the case at all. Once you’re happy with your “Rainy Day” fund, you can start with a small lump sum. As the returns grow, and the returns on the returns (known as compounding), you could see your portfolio growing faster than you thought.
How long do I want to invest for?
Just like locking in a fixed term savings account, it’s a good idea to decide how long you’d like to tie up your cash in investments before they give you the return you’d like. Is it to fund university fees in a few years’ time, to boost your retirement pot, or to buy a property?
Seeing a return on your investment is not a speedy process, so be prepared to go in for the long term: at least five years is standard.
How much risk am I prepared to take?
All savings and investments carry some degree of risk, from keeping cash under your mattress (and we definitely don’t advise this!) to buying shares in a company. The growth of your investment will depend on so many factors – not just the performance of the company, but the performance of the wider market and economy. The key is to make sure you don’t put all your financial eggs in one basket – so just as you wouldn’t keep all your cash in the house, you shouldn’t put it all into one investment opportunity either.
There are degrees of risk in investment, too – and generally, the higher the risk is, the greater the return will be. But conversely, there’s a bigger chance that you could lose all of the money you’ve invested altogether. The stock market is riskier because it’s subject to many turbulent factors, so it’s wise to spread your investment across different sectors, regions and types of asset, such as shares, commercial property, bonds and cash.
What Next?
Speaking to a financial advisor is always the first step when considering your investment options. We’ve got access to up-to-date market information, and can help you think through these questions and more. Give us a call today and take your first step towards a portfolio that works for you.
NB: The value of investments, and any income from them, can fall and you may get back less than you invested.