A straight-forward way to invest
Planning your investment goals is essential if you're going to have a real chance of achieving them.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
Working out exactly what you want to get out of your investments will help you set realistic targets and keep you on track. It'll also give you an incentive to keep going when you need it and enable you to arrange your personal finances to get you where you want to be.
As well as working out what your goals are, you need to think about when you hope to achieve them. Is your goal a long way into the future, for example if you're planning for retirement, or are you investing over a shorter timeframe perhaps for school fees or a property deposit?
When it comes to setting financial goals, most people will have more than one and they're likely to be based on events that you expect to happen at different times in the future. In general, anything you'll need money for in five years or less is seen as a short-term goal, while goals set five to 10 years from now are considered mid-term. Long-term goals are usually those for which you’ll need money in 10 or more years.
For short-term goals, many people tend to opt for what they perceive as safe havens. These tend to be things like savings accounts and cash Individual Savings Accounts (ISAs).
This is because if you're only saving or investing for a relatively short period of time, you need more certainty about how your savings and investments will perform, and for your money to be easily accessible.
For investment goals between five and 10 years in the future, you may want to start introducing shares and bonds to your portfolio as you have more time to grow your investments and longer to recover from any shocks along the way. Funds can be a good way to invest. They give you a quick, easy and relatively cheap way to diversify your portfolio and spread your risk without having to do the legwork of choosing the investments yourself.
For goals 10 years away or more, again you may be prepared to accept a higher level of risk, because if you suffer financial losses, you'll have more time to recover your position. The good news is that the longer you can invest, the better, thanks to compounding. This is when you reinvest any returns, along with your initial investment, to generate further returns in future.
Let's say you invest £10,000 today. If you get a return of 6% then a year from now you'll have £10,600. If you reinvest this £600 and get the same 6% rate, then after another year, you'll have £11,236. In other words, you earned £600 in year one, but the same rate of return got you £636 the following year. That's because the return for the second year is based on a starting value that includes the dividend from the first year.
That extra £36 isn't a huge amount, but if you repeat the process over the next 20 years, returns can build steadily. The next year at the same rate you'd earn £674, and so on. The rate of return assumed here isn't a forecast of any actual return that you might receive. You could get more or less than this and you might get no return at all or lose capital. Any returns you receive are also likely to vary from year to year.
No investment comes without risk and there's always the chance you could get back less than you invest.
Think carefully about how much risk you're comfortable taking on. If, for example, you're close to retirement, you'll want to avoid any big losses just before you take your money out. Understanding your approach to risk will help you determine your asset allocation – this is the term used to describe how you split your money between different investment types such as shares, bonds, cash, commodities, and property. There's a huge choice of investments to choose from, so you need to understand the risks associated with each.
You’ll also need to consider how much you can really afford to invest and crucially, how much you could afford to lose without it having a serious impact on your standard of living or your goals.
Whatever your goals may be, it’s vital to keep some savings easily accessible in the event of an emergency, such as redundancy or illness. It’s a good idea to build up enough readily available savings to cover your outgoings for six months or longer, especially if a lot of your money is tied up in long-term investments.
Once you've figured out what your goals are, you'll need to think about whether your plan for achieving them is realistic. Apart from making sure you have access to cash for unexpected expenses, look at whether the rate of return you need to achieve your goals on time is realistic. For example, if you'd prefer to stick to safer investments like government bonds with an annual return of say 2%, then a goal that depends on you achieving returns of 10% a year isn’t realistic.
Bear in mind too that investments can fall in value as well as rise, so you could get back less than you put in. Also beware of having too many goals. There's nothing wrong with having ambitions, but focusing on multiple short-term goals can sometimes distract you from important longer-term ones, such as saving for retirement. Finally, don't forget about costs, in all their various forms. Annual charges and management fees on some investments such as funds can eat into your returns, so make sure you know what you're paying and why you're being charged. Think about how much you need to achieve your goals after fund managers and the HM Revenue & Customs have taken their share.
Remember too that there are ways to shelter investments from tax, such as individual savings accounts (ISAs) and pensions, although the tax rules that apply to these might change in the future, or even be withdrawn. Their value to you will depend on your individual circumstances, which may also change.
It's worth taking the time to really plan out how you'll invest and what you want to get out of it. Knowing what your goals are, how much you'll need and the level of risk you're happy to accept in order to get there will help you build your investment plan and stick to it.
Always remember that investments can fall in value. You may get back less than you invest.
A straight-forward way to invest
To choose and manage your own investments from a range of funds, shares, ETFs and bonds, get started today by simply opening up an Investment (Stocks & Shares) ISA, Investment Account or SIPP Account with Smart Investor.
The value of investments can fall as well as rise. You may get back less than you invest.
A fully flexible way to invest
Once you’re confident your finances are in order, you need to start planning your investments. Get started by setting financial goals. Are you investing for growth? Or income? We'll help you answer these questions and more in this section.
If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio which includes a range of different investments.