People save and invest money for a variety of reasons: for retirement, children’s education fee planning, to make a major acquisition such as a house or a second home, or to have a reserve for a rainy day. But research shows that personal savings rates are close to the lowest levels in the past 50 years. The US Bureau of Economic analysis puts the current saving rate at less than 5%, less than half of the 10-12% of 50 years ago. So where should I invest money?
So it’s now especially important to make sure that you are making good investments, making the best returns at a level of risk that is appropriate for you. With the mind-boggling range of investment options buried in acronyms and jargon, investing can seem daunting, but successful investment boils down to just a few key points:
- Defining your objectives and planning for them
- Investing enough over time to meet your objectives
- Understanding the basics of what you are investing in and choosing your investments according to your objectives and risk profile
- Keeping an eye out for the tricky things like taxes and fees
Invest money – defining objectives and planning for them
One of the biggest mistakes people make when studying investments is to jump straight to the questions “What’s a good investment?” or “How much should I invest?”, before taking a step back and asking “What am I investing for?”.
This is a major mistake, because the right investments for a 35 year old investment banker saving for retirement are entirely different from those that are right for a 55 year old retiree with more moderate savings.
Step back and think of your current financial situation, income level and life objectives: how much do you currently have saved? Do you have outstanding debt such as a mortgage? What is your current income and how do you expect that to evolve? Are you looking to make specific acquisitions such as a home or second house? Are you looking to retire at a certain age? How are you going to pay for children’s education fee’s? Would you like to ensure that your family is provided for if you pass away?
Actually thinking through these objectives and writing them down is the first step to good investment. You can do that yourself but, as you can see, although each point in itself is simple, there are many points to be considered. That’s one reason to seek the assistance of a financial advisor. Financial advisors go over these issues with all their clients, and so can provide an objective outside view and help you make sure nothing is left out.
Investing enough over time to meet your objectives
One of the main results of a financial plan is knowing how much you need to invest over time to reach your objectives. But the hard part, of course, is actually making sure that you actually save and invest the necessary amount. Too many people go for long periods without saving much, only to attempt to save large parts of their income over short periods of time.
Fortunately there are techniques to help you save appropriately:
Lump sum investment
This is appropriate when you have a reasonable amount of ‘idle’ savings and would like to set them apart right away as an investment for a specific objective. For example, you might want to take a large balance in a low-yield savings account and put it in a portfolio that is designed to grow at a faster rate until your retirement, thereby increasing your returns and also avoiding the temptation of gradually eating into your savings.
This is one of the best ways to save and invest, as relatively low amounts saved each month can add up to huge savings over time. For instance, a monthly investment of GBP 1000 at a 5% rate, over 30 years, yields a balance of over GBP 800,000, of which over half is the interest that compounded in that time! Also, investing monthly allows you to worry less about hard to predict issues like the short-term performance of the stock market or changes benchmark interest rates. For example, if you make a large lump sum investment in 30 year bonds at a 5% rate, and a couple of years later rates go to 10%, you will regret not having waited. On the other hand, if you wait and see, but rates go to 2%, you will regret that too. By investing a little each month, you invest when returns are higher and lower, and over time your rates are balanced out. This is known as Dollar Cost Averaging, and although it is simple it is has been a standard investment technique for many decades and is even used by high-profile, sophisticated investors. Finding the best way to save over time, and making sure you stay on track, is another point where financial advisors can help you.
Understanding the basics of what you are investing in and choosing accordingly
There is a mind-boggling array of possible investment funds and securities out there, and understanding them and finding the right mix is a time-consuming and often difficult task. A financial advisor can be instrumental in helping you pick the right investments and avoiding duds, but it’s still important to understand the basics of the different types of investments, or Asset Classes. Choosing the right mix is a time-consuming and often difficult task, so it’s important to use the services of a professional investments to help you.
Keeping an eye out for tricky things like taxes and fees
Taxes can vary widely depending on your personal situation and the investment structures you choose, while fees can vary widely even within funds that have similar objectives.
These differences, even when they are only fractions of a percentage point of your assets, can have a huge impact over time, and a seemingly brilliant investment can actually be inferior to a simple, low-risk alternative once fees and taxes are taken into account.
One example of a tax and fee reduction alternative are Investment Wrappers. These are provided by insurance companies like Axa, Standard Life, Old Mutual, Friends Provident International & Zurich. Think of an investment wrapper much like an empty bucket that you fill with the various investments that you want to hold in one place with the objective of retirement. In addition to easily keeping track of your investments all in one place, the scale of the insurance company means that they can invest in funds at reduced costs. Capital gains tax can also be mitigated, for instance when you transfer between funds. You can also put the wrapper in a trust for a family member, which has impacts for inheritance tax.
Financial advisors have experience recommending the best tax structures and funds with reasonable fees, so you don’t have to go through all the fine print yourself.
Where should I invest my money?
Why do I need a financial advisor to invest money?
As we’ve seen above, financial advisors can assist you throughout the investment process, from defining your objectives, finding the best way to save over time and keeping you on track, choosing an appropriate mix of investments and explaining them to you all the way to finding the alternatives with the lowest taxes and fees. Even for moderate sums, these benefits easily outweigh the advisory costs.
How does the Investment advice process work?
A financial advisor will arrange a meeting in which we discuss your family situation, current financial situation and goals and complete a risk profile. After the initial consultation they will devise a tailor made investment plan and fund selection which will work towards delivering the desired goals in the right time scales. Part of an advisors fiduciary duties is to meet up regularly and review performance and provide pro-active advice.
Quick Investment tip: Don’t sweat the small stuff.
As a long term investor, you shouldn’t panic when your investments experience short term movements. When tracking the activities of your investments you should look at the big picture. Remember to be confident in the quality of your investments rather then nervous about the inevitable volatility of the short term.