The answers to 6 frequently asked investment questions
Everybody knows that investing for the future is important, but not everybody knows how to go about it. Here are some of the most common questions that new investors ask.
Where do I start with investments?
Your first step used to decide what you want to achieve. Are you saving for a specific short-term goal, such as a deposit for your first property, a new car, or to pay your children's university fees? Or are you saving for the long term, to fund your retirement? Your answers will largely determine how and where you invest.
How much risk should I take?
The shorter your timescale, the fewer risks you can afford to take. You should never invest money in the stock market that you may need in the next few years, as that does not give you enough time to recover from a market crash.
Stick to lower risk alternatives such as cash. If investing for at least five, 10, 15 years or longer, then should put at least some of your money into stocks and shares, as they should deliver greater returns in the longer run. For long-term retirement savings, the stock market is the place to start.
Which shares should I invest in?
Buying individual company stocks is too risky for most ordinary people. Even big household names can crash to earth, just look at banking stocks after the financial crisis. Most people should start with a fund investing in a mix of 30 or more different companies to spread your risk.
A low-cost FTSE All-Share index tracker might be a good place for UK investors to start.
Read more: An idiot's guide to stocks and shares
What does diversification mean?
Investment professionals will tell you to diversify your portfolio, which means spreading your money between different assets, sectors and parts of the world. For example, you should hold some rainy day funds in an instant access savings account for emergencies, and spread the rest of your portfolio between shares, bonds, property and even some gold.
You may also want to split your investment funds across, say, the UK, the US, Europe and emerging markets, and maybe specialist areas such as technology. The point is that when one asset does badly, others might compensate by performing well, giving smoother returns.
How can I invest tax-efficiently?
A company pension is a great way to save, because you should get a matching contribution from your employer, which is effectively free money. You also get tax relief on your contributions, as you do with a personal pension.
From age 55 you can take 25 per cent of any pension withdrawal free of tax, although the rest may be subject to income tax. There is no inheritance tax on pensions. Individual savings accounts (ISAs) are also a tax-efficient way to save, as your returns are free of income tax and capital gains tax during your lifetime.
How often should I check my portfolio?
You should check your portfolio once a year, to see how well it is performing and whether you are investing in the right places. Resist the temptation to tinker: investing is a long-term business and constant juggling can backfire.
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