There can be a lot to think about when you’re making investment decisions, whether you’re just starting out on your investment journey or you’re adding to your portfolio.
Even if you’re an experienced investor, there can be a lot of information to absorb and factors to consider. And for those new to investing in shares or funds, it can be hard to work out where to start. So, we offer up a list of 10 questions to ask yourself when you’re weighing up investment decisions.
How much can I invest?
Before you go any further, make sure you can afford it. If you’ve got expensive debts to repay, attend to those first, and build up an emergency cash fund. If that’s not an issue, make sure you’re only investing what you can realistically afford to lose. This is your capacity for risk. The nature of your investments will be dictated partly by your appetite for risk.
What do I want from it?
Be clear about why you’re investing by clarifying your objectives. These might be long-term, such as building a nest egg for retirement, or more medium term, such as saving for a first home deposit. Or it might be more broad, such as for your general financial security. The objectives that motivate your investment will go a long way to dictating what you invest in.
What’s my investment horizon?
It’s useful to know how long you intend to invest for, not least because it shapes the types of investments you use. Your investment horizon will depend largely on your goals and objectives. For example, if you’re saving for a holiday next year, cash-based savings make more sense. But if you’re likely to be invested for five years or more, stock market-based investments will give you more for your money over the long term.
What kind of investment should I use?
So, the previous three questions – how much you can invest, your goals and how long for – help answer this question. But this is also about other factors, such as your age, financial circumstances and risk appetite. For instance, if you really don’t feel comfortable taking any risk, cash and fixed income products (such as government bonds) will be more appropriate. If you’re ok with risk and have a long investment horizon, you can invest in shares, funds and other ‘risk assets’. Investing directly in shares is particularly high risk, however, so equity funds are the best bet for most investors.
What should I look for in an investment fund?
Investors often look first at how a fund is performing. And while past performance is never a guarantee of future results, look for funds that consistently perform at least as well as their peers over three years or more.
Some firms produce fund ratings that you can use when assessing your options – these include Morningstar and Square Mile, while most fund platforms produce their own lists of preferred funds. Every fund has a factsheet that’s updated monthly and available online and which will tell you its objective, the main companies and sectors it invests in, its track record, costs and how it’s managed, among other features. Here’s more on how to research funds.
What’s the risk?
The amount of risk you take will be dictated by factors including your age, circumstances, capacity for risk and appetite for risk. There’s always some degree of risk in investing – without it, there would be no reward. Different funds and sectors have different levels of risk. For instance, a fund investing only in emerging markets equities will likely be much higher risk than one investing in a range of different types of assets and global companies.
The golden rule with risk is diversification: spreading your money across different assets and fund types to ensure you’re not overexposed to one company or sector. Fund factsheets and other information will give an indication of its risk level. Many investment platforms offer risk assessment tools that help investors get an idea of their risk profile. Our article on understanding risk and reward in investing will help you.
Do I understand what I’m investing in?
We can’t be expected to understand everything about an investment, but an idea of what it aims to do is useful. What the fund invests in, the assets it uses (i.e. equities, bonds, commercial property), the returns it’s aiming for, the level of risk it takes and who manages it are all worth knowing. You might also want to find out how easy it would be to get your money out should you need to (this is the liquidity of an investment).
If any form of investment is promising unusually high returns, there’s a good chance it’s very high risk or even unauthorised. Avoid putting money into something without understanding at least a bit about where it invests and what to expect from it.
Is the investment regulated?
Some of the most eye catching investment returns are promised by firms that aren’t actually regulated. Just because an investment isn’t regulated doesn’t on its own mean it’s dodgy, but it means you have less protection. For instance, if things go wrong with an unregulated investment you’re less likely to have access to the Financial Services Compensation Scheme or Financial Ombudsman Service.
You can use the Financial Services Register to check if a firm is authorised by the Financial Conduct Authority and learn to beware of the latest investment scams.
How much will it cost?
Most funds will charge an initial fee and an annual management charge, usually based on a percentage of the amount you’re investing. Charges have come down in recent years, but they can range widely. They can make a big difference to the performance of your investment, as high charges will erode your returns significantly over the long term. Costs are typically lower on passive funds (such as index trackers and exchange traded funds (ETFs), as they don’t have the same level of research or activity.
Look for ongoing fund charges that seem higher than those levied by most funds, especially if the performance doesn’t seem to justify the extra cost. When you buy funds through a platform you’ll also pay its annual fee, while some also levy charges for buying and selling investments.
Make sure you’re aware about the importance of fund fees and some of the main platform charges you may have to pay. Use our comparison tools to compare the different platforms, including costs.
Should I take advice?
Financial advice is always a good idea, especially if you’re not comfortable making your own investment decisions. A professional adviser will help build and monitor your portfolio and make sure your investment decisions fit in with your wider financial plans. They’ll also help stop you falling into traps such as those created by your investment biases.
That said, if you want to manage your investments independently and feel sufficiently confident to do so, it’s never been easier. Investment platforms provide a range of tools to help you make investment decisions, with some offering their own ready-made portfolios for those needing more of a helping hand. The DIY approach comes with risks, however, and advice can provide invaluable peace of mind. Read more on the pros and cons of both options.
