Last time we looked at why you should have an emergency fund and cash reserves, and how best to manage these. In the next part of the Acuma financial fitness plan, I will focus on savings and investments.
This is a huge area of planning, and arguably the one that most people spend the most amount of time planning for – sometimes to the detriment of other areas of financial planning. When we refer to savings and investments what do we mean? Generally this is referring to longer term savings, which may be for a particular goal or aim, such as retirement, children’s education, or property purchase. How long the term is will obviously depend on your age, and what goal you are looking to save for, but as a guide it is generally for 5 years or more so that the investment has a chance to grow, and shorter term market movements start to be filtered out by longer term market trends.
The key difference is that rather than simply saving into a bank account, the savings are placed into other asset classes. There are a huge number of assets that can be invested into, with the most popular being equities, bonds, property and precious metals. All of these assets have their pro’s and con’s and often personal preference will decide which to invest into.
I generally advocate a well-balanced, diversified portfolio that takes into account all of these and indeed many other asset classes. In the 15 years that I have been involved in this industry it has been almost impossible to predict which asset class is going to perform best, and so having a small amount in many is the best way to smooth out the peaks and troughs that can come with investing.
Establishing what is the right investment for you is vital to ensure that your money is invested in the right place, and that you are comfortable with where it is invested. To do this we need to work out what your attitude to risk is. There is no right or wrong answer and it will vary between all investors. Attitude to risk simply means how much volatility you are willing to accept with your money in return for the potential for higher returns.
Another way to look at it is predictability. If you leave your money in the bank the returns are very predictable – an amount of interest will be added each year, but it is often quite a small amount. So to try and improve that number you may have a less predictable return, but hopefully one that is higher – and generally the longer you are able to invest for, the better the returns will be.
There are two main ways to invest – on a monthly basis and by way of a lump sum. It is often the case that you may have a different view on regular saving to lump sum investment – investors can be keener to take more risk with a regular contribution but with a lump sum are more concerned with maintaining the initial investment, so wish to be more cautious.
This is obviously a brief guide to savings and investments, but I hope that this has given an insight into what to consider, and the right solution will depend on your personal circumstances. Next time I will look at in more detail at saving for education. If you have any queries please do not hesitate to contact me at firstname.lastname@example.org or on 0508543983.