When people ask how to invest money, the ‘how’ really depends on ‘why’, what a person’s goal is.
Your investment journey should start with a goal, and the next step is choosing a product that is suitable for that goal. If investing small regular parts of your disposable income, this can be can done directly with products such as ISAs, Pensions, and General Investment Accounts also known as GIAs. If you’re investing larger amounts you may benefit from a financial adviser.
Goals could be things such as retirement, which is why people invest into a Pension. A Pension is for long term goals like an income in the future. You can invest up to £40,000 a year, and benefit from tax relief from the government. You can then withdraw this investment from 55.
Other investment types include ISAs and GIAs.
An ISA is for shorter term goals such as purchases or general growth, but you should still invest for a minimum of five years. You can invest up to £20,000 a year and benefit from tax free growth, withdrawing at any time, although a minimum of five years gives time for markets to grow and balance out volatility. GIAs have no tax advantage so are best left until the ISA allowance is used up.
There’s an investment product for every goal, and through that product your money is invested in stocks, funds or Portfolios.
For example, you may choose to invest in individual shares. However, that’s potentially a risky ‘eggs all in one basket’ approach, so investors tend to look to funds or portfolios. These are baskets of stocks and other assets such as bonds. This spreads risk and gives diversification to your investment. These investments can be actively managed or passive to match an index such as the FTSE 100.
An important consideration for choosing between investments is your attitude to risk. Shares are very risky as there’s no diversification. Funds are risk rated but limited to one fund manager’s strategy. Portfolios such as the True Potential Portfolios are actively managed, diversified by asset class, industry, geography and crucially blending fund managers strategies together. And of course, these Portfolios are risk rated from defensive to aggressive, so that could be a good place to start if you’re looking to invest money for any range of goals.
To recap, set a goal, find the right product, identify what you want to invest in based on your attitude to risk, and then choose how to invest your money.
For choosing how to invest how your money, think about a lump sum or via direct debit. Putting a lump sum into an investment means you are in the market longer, but you could fall into the trap of trying to time the market. Investing by direct debit means you automate your investment, putting money into your investment at regular intervals. This is known as pound cost averaging, meaning you are never buying at the top of the market price. Simply set an amount based on reaching your goal and what you can afford, then let your direct debit take care of the rest.
What we’ve learned today can be broken down simply into four points. How to invest your money depends on why, what is your goal? You then need to choose a suitable product for that goal such as an ISA or Pension, which will enable you to invest in shares or Portfolios based on your attitude to risk. You can then invest either by lump sum or direct debit, closing the gap to your goal and tracking growth in your investment.
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