Often a story pop ups about someone who sold their company for millions and all of the investors made a fortune on the shares.
That’s one of those scenarios where you think: Why can’t that be me? How did they even know how to invest in that company? Where would you even start if you had some spare money to invest?
There’s a lot to consider before you invest, even if you have a few bob lying around.
Because it’s not like the movie Wolf of Wallstreet, with fancy parties and dramatic shouts of ‘sell, sell, sell.’ You have to be very prepared before dipping a toe into this world.
John McNicholas, director at the Everlake financial services firm, says that even before you consider investing your savings, there are several factors to evaluate and to allow you to make a sound decision.
Firstly, he says, you must focus on paying down any debt you have, particularly high-interest obligations.
“The returns from investing are unlikely to consistently outpace the cost of that debt without taking on a substantial amount of risk,” Mr McNicholas says. “Even for something like a mortgage, which usually carries a lower interest rate, paying it down can often offer more guaranteed financial benefits than speculative investments.”
It is crucial that you have an emergency fund, typically the equivalent of six months’ worth of income and that this be set aside in a safe and easily accessible place.
“This will provide a safety net for unexpected expenses or income disruptions,” Mr McNicholas says
When it comes to investing your money, be sure to do your research. Some good online platforms can help with investing advice and there are even short courses in local colleges and online.
Read up as much as you can before you take the plunge.
“Investing is best suited for individuals who have a long-term horizon, ideally a minimum of eight to 10 years,” says Mr McNicholas.
“This time frame allows your investments to ride out the natural fluctuations in the market, giving your portfolio time to grow and recover from short-term volatility. Shorter-term investments may be exposed to greater risks without reaping the full benefits of compounding over time.”
Although the stock market can be a glamorous place to imagine your investments blooming, Mr McNicholas says that, for most people, the most effective way to start investing is through a pension.
“No other post-tax investment is likely to deliver a guaranteed return of that magnitude.
“Pensions align well with the long-term investment horizon necessary for growth, as they are inherently designed to be long-term savings vehicles.
“For this reason, it’s often advisable to max out your pension contribution before considering other investment options.
“The combination of tax savings and long-term growth potential makes it a superior option for most investors.”
When considering your investment portfolio, you should build it around your goals and values, Mr McNicholas says.
Your circumstances and preferences are the most important considerations when designing investment portfolios.
“Different investments have different taxation treatment, so it’s wise to understand the different alternatives and which may be the most tax-efficient investment option for your circumstances.
“Every investor’s goals and objectives are different, so it’s vital that the asset allocation is correct for you.”
Cash and bonds would be considered ‘safe’ investments, while equities and real estate would be seen as higher risk.
When considering investing, you will come across the term ‘diversification’, which essentially means not putting all your eggs in one basket.
“Diversification is the closest thing there is to a free lunch in investing,” Mr McNicholas says. “Proper diversification increases the likelihood of earning expected returns and may reduce risk by eliminating risks you are not paid for taking.”
There are plenty of companies that are experts in helping with investments, but it is so important to do proper research before choosing the right person or company to work with, should you decide to go that route. “Humans are emotional and in the face of marketing noise and market volatility, investors must maintain their discipline and stick to a long-term investment strategy,” Mr McNicholas says
While investing can be an excellent way to grow your wealth, it’s essential to have the right financial foundation.
“Prioritise paying down debt, building an emergency fund, and taking full advantage of pension benefits, before venturing in to other investment strategies,” he says
All in all, investing can be exciting and interesting and so it will pay in the long-term to do proper research and homework.
Your money is hard-earned, so don’t be in a rush to throw it away.
