Your coffee break investment plan - Day 3: Setting investment goals
Why are you investing? What will you spend your money on? How much will you need to cover your future costs? These are the all important questions you need to ask before deciding where to invest your hard-earned cash.
Of course, no one knows what the future holds. You might win the National Lottery on Saturday evening or be handed your P45 on Monday morning, but having a broad financial plan in place will help stack the odds more in your favour.
Your first task is to clear outstanding debts as even the best performing assets are unlikely to deliver a return greater than the interest you are being charged. At the same time, make sure you have a rainy day cash fund of 3-6 months salary to take care of emergencies. Then you can turn your attention to longer-term investments.
Are you saving for a particular requirement, such as paying school fees? Do you need your money to grow by a certain amount to buy a house or car? Is your aim to be mortgage-free by your 50th birthday so you can travel the world?
Your future plans will not only have an impact on the amount you can invest – but also the length of time you can lock this money away and the amount of risk you need to take. As always, the golden rule is that you must only invest what you can afford to lose.
So what type of investor are you?
Lower risk investor
You prefer to put your money in safer investments, as you are concerned about losses. There is no such thing as a completely safe investment, but lower-risk products include bonds (loans from governments or companies) and investment funds that hold a diversified mix of asset classes.
Medium risk investor
You accept the need to embrace a certain level of risk in order to have a chance of generating decent returns, but don’t feel comfortable putting all your money into funds that focus purely on more volatile areas of the world.
Higher risk investor
You want to generate the highest possible returns on your investment – even if that means running a significant risk of losing the lot in unfriendly market conditions. You will be comfortable embracing areas such as the emerging markets.
You should also consider investing in stages rather than in one lump sum because it is impossible to accurately time the market. Get it wrong and the value of your savings could shrink overnight and affect your ability to achieve your long-term financial goals.
Darius McDermott, managing director of Chelsea Financial Services, suggests paying a set amount in on the same day each month to buy units of a fund at whatever price they are available. This is a technique known as pound cost averaging.
“If you regularly invest £200 into the fund and have been buying units at £8 each, when they fall down to £6 you will get more units for your money,” he explains. “You get an averaging effect and it’s a great savings discipline.”
Of course, just because you fall into a higher risk category now doesn’t mean that will always be the case. That is why you must reassess your life goals and risk appetite every year to take into account events such as having a family and changing your career.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.