WHETHER it’s shares, fine wine or Bitcoin, deciding whether, and where, to invest your hard-earned cash is a big step. If it goes well, investing can be extremely rewarding, with historic studies such as the Barclays Equity Gilt Study showing that conventional investments such as a balanced stocks and shares portfolio nearly always outperform cash savings over time.
But before you put a penny into investments, you need to be completely sure you know what you’re doing. Here are ten of the most important things experts think you should ask before you begin.
1. Can I afford it?
Whether you are putting in a lump sum or a monthly amount into an investment account, you’ll need to make sure there aren’t any other calls on your money, says Sam Blanning, financial adviser at Star House Financial Services in Bristol.
Investments move up and down in value and it can take time to get investment money back into your savings account. So the first step before you invest should be to go through your monthly budget to check you have extra.
2. Is my financial house really in order?
Before you invest, there are other things you should do first. Carl Roberts, at RTS Financial Planning in Milton Keynes, suggests you ensure you have an emergency savings fund before investing any cash.
Star House’s Sam adds that you should check whether you have paid off expensive debt, including credit card bills. Checking your family has appropriate insurance against illness and unemployment may also be a priority above investments.
3. How long will it be before I need this money?
We all know that the value of investments moves up and down, but studies show that this volatility decreases over time.
Financial experts are clear, investing should be for the long term only.
‘Five years should be the minimum you invest for,’ says Minesh Patel, director of EA Financial Solutions in London. ‘Ten years is even better.’
4. What is the cost?
Investment comes at a price, with charges levied for buying, selling and holding investments, as well as charges for financial advice and expert fund management. Sam adds that you should ask yourself, whether you understand what you’re being charged, and if it is reasonable?
It can be very hard to work out exactly what the costs are, so make sure you check with whoever you are buying your investments through and are clear on every single charge.
5. How much could I lose in a worst-case scenario?
Losing money is uncomfortable. Behavioural science studies show that we feel roughly twice as bad about every penny we lose as we feel good about every penny we gain.
Alan Chan, financial adviser from IFS Wealth and Pensions in north London, suggests checking whether you can afford to lose all the money, as well as working out whether you could achieve your expected level of return with less risk.
6. Do I understand how this investment works?
In the words of JK Rowling’s famous headmaster Albus Dumbledore, you should never trust something if you can’t see where it keeps its brain, and investments are no different.
Mike Rawson, a private investor who runs financial blog 7 Circles, says you should be very clear on what you’re investing in, and the strategies behind it. Don’t be blinded with jargon. If you don’t understand how the blockchain works, or what a smart beta strategy is, ask before you put in a penny.
7. How does this fit in with my long-term plan?
What works for someone else won’t work for you. ‘Check it fits in with your existing investments,’ adds 7 Circle’s Mike. Making a plan for the times when you might need money − for a house deposit, school fees or retirement − could help you to decide which assets are right for you.
8 . Can I put this investment in a tax-free wrapper?
Isas and pensions can make a huge difference to your wealth, as they allow your investments to accumulate tax free. With pensions you get the tax you have paid added back by the government too. ‘Investing via an Isa not only cuts your tax bill, but it’s also a good sign of a reputable investment,’ says Faith Archer, money blogger at Much More With Less.
9. Is this investment authorised?
The Financial Conduct Authority (FCA) is the regulator for investment products. If a company is registered with them you’ll have some consumer protection from poor behaviour by the company you invest with (though not from losing money through stock market fluctuations). Star House’s Sam suggests checking the FCA register online (register.fca.org.uk).
10. Do I need expert advice?
Independent financial advice comes at a cost, but if you don’t know the answers to all of these questions it may be worth paying. An expert can help you to assess what types of investment are right for you, and guide you on your financial plans. You can find financial advisers at unbiased.co.uk or vouchedfor.co.uk.