How To Invest Your Hard Earned Wealth
Hello this is Gemma at Clinic Alchemy, the alchemist here to give you great tips on how to manage and grow your wealth.
In my last Vlog I gave you the motivation to save, the proof in the pudding by those clever compound calculations. BUT – I can hear you scream – how do I make a 7% return? I only get 0.5% from my bank account!
At the time of Vlogging, you can’t make 7% in a UK cash account. You will need to invest to make this type of return.
Now stop. Please, don’t go mad! Please don’t see that ‘fabulous’ opportunity to invest in some field far away that promises you a guaranteed return. If it sounds too good to be true, then it probably is!
So today I’m going to give you the fundamental points to consider before you invest your hard-earned wealth. These have a handy mnemonic – TRAIT
Incredibly important factor when it comes to investing. If you have money to invest, ask yourself the following:
- How long are you looking to invest for?
- When will you need this money?
- How much of this money will you need and when?
- Will there be any reason why you would need the money sooner than planned?
These questions are really important when it comes to how you invest and what you invest into.
For example, you may be 30 and uber-excited about retiring at 55 – however, if you also need the money to build the extension in 5 years, putting money into a long term investment may not be the best strategy. (Although putting some there is always a good thing)!
One other thing to bear in mind when investing, actually it is really important – Only invest money for the future….
ALWAYS make sure you have sufficient cash in an easy access account to cover unforeseen expenses. At a minimum, I would say 3 lots of your monthly take home pay, plus any large planned expenses in the next 3 years.
So, in summary, if you have money to invest, the theory is that you should be prepared to lock this away for a minimum of 3 years. Why? Because if you invested at the peak of the market and then we had a market crash, the history stats show that, as a rule of thumb, it takes about 3 years to recover the capital. If you don’t believe me, enjoy looking at this graph which illustrates how your investment would have performed based on when you invested.
MSCI World Index
How much risk are you prepared to take on your capital? How would you feel if your capital fell 5% in a year? How about 15%? How about 30%?
You need to be comfortable with the amount of risk you are taking with your investment. Risk can be managed by what you invest in and ensuring you have a diversified investment portfolio.
Having said this, if you are investing for the long term, then you may be happy to take a more adventurous approach to investing (this still does not mean investing in the ‘too good to be true’ investment). Conversely, if you require this money in 5 years, and or have little capacity for loss, you may wish to take a more cautious approach to investing.
Risk can be managed by what you invest in. I will do a vlog on this itself, but the bullet points are ensuring you diversify your investment portfolio by asset classes such a fixed interest, equities, property and also geographically across the world. How much you should invest in each comes down largely to your attitude to risk and your capacity for loss.
When do you need the money? When investing, you need to ensure you can access it when you need it; There is no point locking money into a long term investment (i.e. pension (assuming you are not near pension age) / 10 year stock / property) if you require the capital in the short to medium term.
- Investment strategy
Having considered the above points it is now time to turn to what exactly you should invest in. There is certainly no one size fits all. It will depend on all of the above points plus ethical considerations. From here we can build a well-diversified portfolio for you. I will explain how to do this in the next VLOG.
Okay, so don’t allow the tax tail to wag the investment dog. But . . .
If there are tax efficient vehicles that suit the above traits, i.e. timing, accessibility, and investment strategy, then use them and save tax! We financial techies call them ‘wrappers’. I call them sexy wrappers (hey – I’m trying to make this sound fun)! Wrappers such as ISAs and pensions allow tax-free growth during the investment and no CGT on encashment. Pensions also allow tax relief on the contribution (up to your allowance) and ISAs tax free income on distributions. There are other wrappers but these are the main ones to consider.
So there ladies and gents, doctors and surgeons, are the main factors to consider when investing.
Next up Let’s Invest – I’ll show you how!
Let’s Invest – Doctors guide on investing
This is Gemma at Clinic Alchemy, the alchemist to help you grow your wealth. If you like what you have heard, feel free to give us a thumbs up and share the blog.
In my last VLOG I gave you TRAITS to consider before investing. If you are prepared to invest then this vlog is key, as it will give you the ABC – the building blocks on how to build yourself a solid portfolio.
What to invest in.
Look at the table below. This shows the main asset classes that one can invest into. Which one should you invest in. Which one will be the best performer in the long term?
It is a trick question. What is good one year may be bad the following year!
The Golden Rule for investing is Diversification – never put all your eggs in one basket.
When investing you want to ensure you are investing a range of asset classes.
There are four broad asset classes that are used when building an investment portfolio. These are cash, bonds, equities and commercial property.
There are two types of bonds – Gilts and Corporate Bonds:
- Gilts (‘gilt-edged securities’) – are where you lend money to a government over a set time period. The government promises to pay a percentage each year and then you get your money back at the end. A less stable country will have to offer higher returns to attract investment compared to stable economies.
- Corporate Bonds – are the same as Gilts, but instead of lending the money to governments, you are lending it to companies.
Equities are investments in the stock market, i.e. you buy a share in a company. Often people buy funds of equities which are a collection of equities.
- Commercial Property
This is where you invest in offices, factories, etc., rather than homes.
So, by putting some of your money in UK companies, some in US companies, some in property, etc., you are diversifying the risk, creating smoother returns and less volatility in your portfolio.
Risk can be managed by allocating different proportions of your money to different assets and across different areas of the world. This is called asset allocation.
Golden rules on investing:
- Never take a tip from your friend at the golf club, on the new thing to invest in.
- If you do not understand it, don’t do it.
- If it seems to good to be true, it probably is.
- If unsure, take advice from a qualified, regulated, independent adviser.
- Invest for the medium to long term.
- Review investments regularly (or have someone review them for you).
- Don’t panic if markets fall – they will. Sit tight and ride out the storm (or, if you are feeling quite adventurous, invest more)!
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