Investing for the first time? Here are five questions to ask yourself before you take the plunge.
What do I want?
What are you trying to achieve by investing your money? For example, you might want to build up your wealth through capital gains, hit a financial goal like a house deposit, to save for a rainy day, or to draw a regular income. Depending on the answer – or answers – your investment options will look very different.
How long have I got?
Your timeframe makes a big difference. This isn’t just about knowing you can access your cash if you really need it, though that is important, for at least some of your money. The point here is that the longer your timeframe, the more risk you can bear. If you can afford to take the long view, you can more easily ride out short-term dips in investment performance.
Am I ready?
There are a handful of things you need to straighten out before you start investing. Top of the list is paying off expensive debt. Expensive debt means credit cards (often way over 25% interest), short term loans, and bank overdrafts. You’re unlikely to find an investment that can guarantee to generate an after-tax return which will service these debts. For most people it’s a simple rule: pay off any debt apart from a mortgage before you start investing heavily.
How much can I afford…
Clearly the more money you can put to work the better. Ideally, kick off with a lump sum and add regular savings. Depending on the amounts you can afford, different investment options will be available.
…and how much can I afford to lose?
This is really a way of asking yourself, how much risk are you prepared to take? Investing shouldn’t cause you sleepless nights, so it pays to understand your risk tolerance. A well-diversified investment portfolio will manage your risk exposure to any single event and reflect your attitude to and ability to withstand risk.
For most people, a first investment is best channelled into general, global funds which offer the possibility of capital growth or income, the ability to cash in quickly if needed, good risk management, and lots of choice on the amount you can put in. If that helps you catch the investing bug, you can build on this success to acquire more specialised investments.