Tuesday July 16 2019



Village Features

Investment: the key questions

Posted on October 30 2018 at 1:11:54


Martin Pryor provides tips on deciding how to invest and how much risk you want to take.

We all have different priorities when it comes to investing. This month we explore some basic questions to ask yourself before taking the plunge.

Am I ready to invest?

Investing is inherently risky and not for everyone. Questions to consider before investing include: are you out of debt? Are you saving into a pension? Do you have the appropriate insurance policies set up to help you in case of disaster?

If you can answer yes to all of those questions, it’s more likely that you are in a position to use some of your money to invest.

But keep in mind that every type of investment has potential hazards and that you could get back less money than you put in.

There is no such thing as a free ride when it comes to investments – and if you’re being promised a high return, it’s often because the investments carry risk.

If you’re thinking of investing because you’ve been approached by someone promising unusually tempting returns, think very carefully before you stump up any capital.

In general, no investment is worth making if the people selling it are resorting to contacting strangers to drum up business.

If you receive an unexpected phone call or email, for example, the best policy is to ignore it. Any offers you get in this way are likely to be a scam.

How much risk do I want to take? 

All investments carry some element of risk, but some are generally viewed as riskier than others.

Of the investments commonly bought by consumers (shares, property, funds, and corporate and government bonds), shares are typically thought of as the most volatile and therefore the riskiest.

Shares can rise and fall in price as a result of a range of factors that can be difficult to anticipate.

Corporate bonds are another option. These bonds are like IOUs issued by companies as a way of raising money. Essentially, you loan the firm capital and are ultimately repaid with interest, so you would hope to get back more than you put in.

However, companies can and sometimes do go bust before repaying bondholders.

Companies viewed as safe bets will be able to offer lower rates of interest, while companies perceived as having a higher risk of default will have to pay more to raise the money they need.

This brings us back to our earlier point about higher rewards often coming with higher risk. With government bonds, also known as gilts, the government would have to default in order for you not to get back what you’d been promised. However, this also means that they don’t tend to pay as much.

In fact, when big-time investors are worried about risk, they sometimes flock to government bonds, which drives up the price and lowers the yield – how much you get back for what you pay.

Sometimes this can even lead to negative yield, when people are willing to get back less than they paid in just because it’s safe.

Other risks may include:

Liquidity Risk: In other words, getting your money out when you need to. This can be especially relevant if you choose to invest directly in property.

Longevity Risk: This is the risk that you will outlive your savings and is especially important when considering retirement.

Horizon Risk: This could be an unforeseen event that causes you to sell investments earlier than you planned, which may mean that you lose money.

Should I take advice? 

An adviser will be able to help you create a plan to meet your goal and recommend the right balance of investments for your risk appetite, while taking into account how much you could afford to lose.

You might find out your investments require more time than you are willing or able to spend. If this is the case, you should consider hiring an adviser to assess your situation and goals in order to recommend a portfolio for you.

Do I know who I’m dealing with? 

Make sure any investment firm or adviser you might use is authorised by the Financial Conduct Authority (FCA).

If you use an unauthorised firm, you won’t have access to the Financial Services Compensation Scheme (FSCS) or to the Financial Ombudsman should you wish to make a complaint or in the event of a firm going bust.

How much do I need to make? 

It’s generally not a good idea to choose an investment solely according to how much money you think you might make.

There are number of other factors that you should consider, including the volatility of your investments and how long you intend to remain invested.

Remember, returns are unpredictable and the higher you want your returns to be, the greater the odds that you’ll have to take more risk in trying to achieve them.

Think about what your priorities really are. After all, if you’re not seeking particularly high returns, why take on more risk than you need?

What about tax?

The issue of taxation also needs to be considered before investing, as your personal tax situation may have a bearing on your decision.

For UK tax payers, the tax benefits of investing in a pension plan can be considerable, especially if you are a higher-rate tax payer. So think about how your investment plans will fit in with any pension contributions.

There are other means of investing that can provide tax benefits. An Isa (Individual Savings Account) provides a tax-free way to save or invest.

It is also important to think carefully before withdrawing money from any investment as the timing and the amount of such a withdrawal could lead to you incurring a tax charge.

Do I care about ethics when investing my money? 

Finally, remember that you may be investing in real companies, whose products or services may affect the wider world.

This might not matter to you, but some investors like to invest only in companies with which they agree from an ethical standpoint. For example, some people may choose to steer clear of investments associated with fossil fuels, or tobacco.

Whatever investment route you decide to take, make sure any firms you decide to deal with are legitimate. Remember, scammers may come across as very professional.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Oast performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances. Tax laws can change. The Financial Conduct Authority do not regulate tax advice.  

*  Contact Pryor Portfolio Management for more information:
Tel: 07961 162818
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