Points To Consider Before Investing
Points To Consider Before Investing
In the current climate of low interest rates (not to mention the exchange rate) many clients are asking what is the solution for their savings? What can I access that is safe and will pay me 6% per annum with no sleepless nights! Whilst it is certainly possible to find a product that will pay 6 or 7% with little risk it is usually better to look at creating a portfolio of these low risk assets, which may be a combination of bank protected products and non-volatile cautious funds that are not exposed to the stock market.
It is clearly riskier to invest in a single security, whether it is with a bank or a low risk fund than in a spread of securities. Put simply when a portfolio consists of a number of securities, and if these are constructed in a fashion that they have little or no correlation to one another, the potential problem associated with one particular security will not have such a major impact on the value of the portfolio.
A good Independent Financial Adviser will be able to create a diversified portfolio for you and will be able to tailor this to your specific needs or income requirements. Before you make any decisions on your finances it makes sense to give some thought to some of the following questions as they will be fundamental in ensuring you receive the very best advice for your given circumstances.
The first which may seem quite obvious, is how much money do you have available for investment? For example you may want to keep a certain amount in cash account for any immediate future needs or unforeseen circumstances. As a general rule of thumb it is always wise to have 6-12 months worth of income readily accessible but you may also want to consider any additional needs over and above your normal income requirements for emergencies or to pay for luxuries such as a new car (wishful thinking maybe!), a holiday or home improvements.
After considering your immediate income requirements and decided on an amount that you can afford to invest, you may then want to consider how much liquidity you would need from any investment for more long term future needs? What are your time horizons? Will you now be happy to take a fixed regular income or leave it for capital growth or will you need to have the safety net that a percentage of your capital can be accessed should a need arise in future years. In general this might be any of the original capital (not necessarily the income or growth) that may be needed within less than about five years.
The next question is whether you will need income or capital growth or a combination of the two. The income requirement could be for the maximum possible level of immediate income, alternatively some clients will not be interested in income and want to focus on maximum capital growth.
You attitude to risk and approach to investment matters will be central to the recommendations that will be made for both the types of investment and the balance between them. For some clients, they may not be prepared to take any capital risk and as such the portfolio will need to be constructed solely of bank protected products and others may be prepared to accept a small degree of risk in exchange for a higher return and likely a higher degree of liquidity. Risk can be a confusing subject as there are a number of risks that will apply aside from the obvious risk to capital. In short these are inflation risk whereby your money loses its spending power as inflation takes over. Counterparty risk the strength of the institution your money is held with and short fall risk, in simple terms not having enough money to cover your financial needs.
A good Independent Financial Adviser will be able to explain how any of these risks may impact on your finances and will also help you to identify and quantify your needs as discussed in the paragraphs above. From this point they will be able to present you with the best available options that you have to consider.
Expat Wealth Builder provides tailor made solutions for all your financial planning needs.
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