Seven questions to ask before you start investing

10th October 2018

Investing can seem like a daunting process. But getting to grips with investing can lead to greater financial security and growth.

Whether you’re investing for the first time or expanding your portfolio, it’s important to understand how your objectives and situation should influence your decisions. Asking these seven questions beforehand can support you when it comes to making investment choices.

1. What are your goals?

Before you even start investing your money, you should have a realistic idea of what you’d like to achieve. Your goals will have a direct influence on which option will be best for you.

  • Do you want to build a nest egg for retirement?
  • Save for your child to go to university?
  • Build a house deposit?

Answering this question should set the foundation to move forward with investment decisions.

One of the key things to think about here is whether you want to invest for income or growth.

Investing for income means you’ll likely want to sacrifice the potential of higher returns in favour of stability and consistency. Conversely, investing for growth means you’ll probably have to take greater levels of risk.

2. How frequently will you invest?

The answer to this question will come back to your current situation. You have two options; investing a lump sum or ‘drip feeding’.

If you have a lump sum of cash that’s not delivering the returns you want, investing it can make sense. Likewise, if you’ve recently acquired a lump sum, such as through the sale of property or inheritance. The other option is to ‘drip feed’ money in at a consistent rate, for example, as you get paid each month.

As markets fluctuate, timing investments to maximise return and minimise risk is incredibly difficult and generally not advisable. As a result, ‘drip feeding’ money is a conventional way to reduce the impact of this. It’s an approach that means dips have less of an effect.

Of course, you can create a hybrid strategy too; investing a lump sum to get started and continue to add to it at regular intervals.

3. How much risk are you willing to take?

Chancing higher returns means potentially higher levels of risk. By taking greater levels of risk, your initial investment can climb significantly. But on the flip side, you do risk seeing greater fluctuations in value.

The answer to this question will be personal. It will all come down to how risk averse you are. Taking the time to think about how much uncertainty you’re willing to tolerate for the chance of returns is crucial. There are investment opportunities for all risk appetites.

4. What is your capacity for loss?

All investments can decrease in value and, in rare circumstances, be lost altogether. The chance of this happening varies depending on the investment choices you make. But you need to consider what you can afford to lose.

Investing all your wealth is rarely, if ever, a good idea. Ideally, you will have a separate account that you can use to fall back on should you experience a financial shock. No one wants to lose money when investing but it shouldn’t leave you in a financially vulnerable position should it happen.

If your finances would be devastated if you lost the money you’re planning to invest, it’s worthwhile looking at alternatives. Other options, such as a Cash ISA, may be more suitable for your circumstances.

5. How long will your money be invested?

Your investment timeframe will be influenced by your overall financial goals and directly affect how much risk you can afford to take.

Investment markets are constantly rising and falling. The longer you invest for, the more likely you are to be able to ride out short-term volatility risk.

Broadly speaking, you should look to invest for a minimum of five years. And the general rule of thumb is; the longer your money will be invested for the greater level of risk you can afford to take.

So, if you’re investing with a view for retirement that’s still decades off, you’re more likely to benefit from choosing markets that are more volatile. In contrast, if you’re holding money in a Stocks & Shares ISA to buy a home in five years’ time, a more conservative approach is wise.

6. How frequently will your review it?

Do you want to take an active role in managing your investments? Or do you want someone to do it for you?

Again, the answer to this question is personal; there’s no right or wrong approach. However, it’s advisable that you review your investments on an annual basis at least. This allows you to plan more effectively for the time when you want to withdraw the money and reflect changes in your circumstances. It’s also an opportunity to make sure your money is working as hard as possible.

7. What other assets do you have?

If you’re already investing, it’s important to look at any new investments in the context of these. You want to hold a diverse range of assets. This means should a portion of the market experience volatility, you’re somewhat cushioned by your other investments.

Even with these questions answered, investing can still seem like a minefield if it’s a new venture. Contact us today and we can help you review your existing investment portfolio or discuss how you could begin investing. By taking a bespoke approach, we can align your investments with your personal aspirations.