“If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”
We used this famous Warren Buffett quote in our last article on bonds and wanted to highlight it again as we delve further into the how, where and when of investing your money.
There are so many questions when thinking about investing your money, such as when is the right time? How will it be invested? And probably the most important one – where is my money?
The key thing to remember is that there are options for everyone.
When you have decided that you want to invest your money, the first question to ask yourself is how long do you want to invest for?
Working out your objectives and your expectations is key to determining your investment timeline. It will allow you to clarify if you want to invest for five, 10 or 15 years for example.
It is also important to factor in the fact that different investments behave differently over time. If you want to invest for less than five years, then it’s probably worth ruling out the stock market.
If the stock market dropped and you lost 15% of your investment, you have very little time to weather the storm and generate a good return for you.
What happens if you have a rainy day emergency? This all forms part of your plan for working out your investment timeline. If you think you’ll need to access your money quickly, for whatever reason, then a high interest savings account, such as an ISA, might be the best place to invest.
Going back for a second helping of Buffett, it’s worth remembering one of his most famous quotes, as it will allow you to really think about when you will need your money back. He said: “Our favourite holding period is forever.” (1).
Once you’ve worked out a realistic timeline for your investment, you can start to think about your return expectations, as well as assess your attitude to risk.
As much as we’d all like to generate a 100% return on our hard earned cash, is this realistic?
Often your current circumstances guide these decisions. It might be that you’re at the peak of your career and you want to shoulder more risk in order to achieve higher returns.
It could be that retirement is around the corner, so you may want to take less risk with your capital.
You may be willing to accept losses to earn higher returns, or you may want your risks to be lower, however, the rate of return will also be lower.
Your IFA should be trained to ask you the right questions to help you make the best decisions, as well as help you understand the difference between a low and high risk investment. This will ultimately allow you to be in a better position to clarify your return expectations.
As we’ve mentioned stocks can give you a higher return, but have a greater risk, while Government bonds (which we examined in our last article) provide a lower return, but also offer a lower risk.
Put simply, to achieve a better rate of return than you would from a savings account, you are likely to have to take more risk.
Also, investments that people think are low risk, such as cash investments, can sometimes come with their own challenges. Historically, these investments can leave you exposed to the risk of inflation. When interest rates go down, your rate of savings generally do as well. And if savings rates aren’t keeping up with the level of inflation, the long-term purchasing power of your money is eroded.
Whatever investment you choose to make, it’s important to think about your capacity for loss. Never invest money that you are dependent on and cannot afford to lose.
Many of us think our risk tolerance is higher than it is. A good IFA will educate a client on this, as well as use a number of methods to help assess your attitude, such as an Investor Risk Profile. Together, this will ensure you are making the right choice.
It’s true that money doesn’t grow on trees, but using an IFA as your financial horticulturist will help you nurture your hard earned cash and make your money work for you.
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage.
Sources: 1 – Investopedia – Rules That Warren Buffett Lives By – 5th August 2016
This content reproduced courtesy of World Wide Financial Planning.Last modified: June 10, 2021