Achieving your goals by weighing the potential risks alongside the prospective returns
A well-defined investment strategy is one of the cornerstones of a successful financial life. Investing is about building wealth slowly rather than getting rich overnight.
While investment techniques vary widely, all good strategies are built on the same foundation. The principles for investing over the long term require holding a portfolio of investments and weighing the potential risks alongside the prospective returns.
Taking a long-term view
The longer you invest, the greater the potential effect of compound performance on the original value of your investment. Many investors will be familiar with the term ‘compounding’ from owning cash savings accounts. The term refers to the process whereby interest on your money is added to the original principal amount and, in turn, earns interest. Over time, compounding can make a significant difference.
Your investments can also benefit from compounding in a similar way if you reinvest any income you receive, although you should remember that the value of stock market investments will fluctuate, causing prices to fall as well as rise, and you may not get back the original amount you invested.
Spreading risk – the importance of diversification
Shares, bonds, property and cash react differently in varying conditions, and opting for more than one asset class can help to ensure your investments won’t all rise or fall in value at the same time.
It’s important that you aim for a level of risk you are comfortable with which reflects your investment objectives.
Understanding your investments
While a well-constructed portfolio should generate a healthy return for investors, the opposite is also true. It’s easy to incur permanent losses by putting money into an asset that behaves in an unexpected way. Investors should always set aside time to try and understand what it is they want to hold.
Focusing on the real rate of return
Inflation and taxation are factors that can affect the real rate of return on your investment. There are certain options that can reduce costs, including the use of tax-efficient wrappers, namely Individual Savings Accounts (ISAs), pension plans and employment ‘save as you earn’ schemes. There are also inflation-protected instruments, such as index-linked bonds (interest-bearing loans where both the value of the loan and the interest payments are related to a specific price index – often the Retail Prices Index), National Savings investments or commercial property holdings, where rents can often be increased in line with the rate of inflation.
Making the right investment choices
To make the right investment choices, you need to ask the right questions. And when it comes to answering those questions, we can help you find the best way forward. If you would like to get a sound point of view about what may be right for your unique situation, please contact us. We’ll review and discuss your financial situation, help you set goals, suggest specific next steps, discuss potential solutions and provide ways to help you stay on track.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.