The appeal of becoming an investor as opposed to a ‘passive’ saver, where you simply put money away in a savings vehicle and rely on the interest is mainly that of possible higher returns. Generally speaking, if you invest pro-actively you have more potential for growth than leaving your money in, say, a savings account.
This is becoming more relevant as current interest rates stay so low, with the resultant smaller gains for money placed in savings accounts. It can be argued that, long term, savers are losing out as inflation will wipe out the gains based on present low interest rates.
The potential downside to investing is that of risk; your investments can go down as well as up so you have to be prepared to live with risk and decide if investing is right for your savings mentality and your circumstances.
The following tips will help you decide if investing is the right path for you.
Financial goals
Establishing what you want to achieve in terms of financial yield will determine whether investing is an appropriate path. If your savings goals could be met with the returns from standard savings accounts or cash ISAs, then is it worth the time and risk?
Alternatively, if you want to make your money go further and get maximum return from what you have available then investments are the way forward.
Knowledge
Understanding the markets, and knowing where to find up to date information, is a crucial element of investing. Various sources of information from experts in the investing field are, such as the IG Community resource. Use them wisely to invest with confidence.
Check your rights as an investor; there is protection from bodies such as the FCA (Financial Conduct Authority) against poor service. If your complaint is unresolved, you can take things up with the FOS (Financial Ombudsman Service) and, in some cases, seek compensation through the FSCS (Financial Services Compensation Scheme).
Be aware, though, that you can’t simply claim or complain against basic financial risk if you lose money on an investment unless you can establish professional mismanagement or negligence took place.
Prepare the way
Before plunging in to investing, get organised:
Reduce or pay off debt – the costs of debt interest can outweigh your investment gains
Protection and safeguards – don’t leave yourself exposed if the unforeseen happens while you’re in the midst of your investment plans. Ensure you have savings to cover things like periods off work, and that and you’re adequately insured. For example, check your life cover if you have dependents
Retirement – your investment goals may be to try to improve your retirement income situation but, in the meantime, check your other provisions such as work pensions
Diversification
Once you decide to become an investor, a key strategy is to establish a varied portfolio through diversifying. The old adage ‘don’t put all your eggs in one basket’ is especially relevant with investing.
The benefits of diversifying mean you also cover more variables. Shares tend to move with the fortunes or otherwise of companies and sectors, interest rates and the wider economy tend to influence bonds and property.
Spreading your assets will help you minimise risk and give you the potential of a healthy return long term.
Sensible investing
So long as the ‘risk versus reward’ principle of investing is understood, and you plan a sensible strategy based on a diversified portfolio, investing could be a worthwhile course of action. Don’t take this lightly and the rewards could be significant.
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