For the would-be investor, there are a number of basic elements underpinning all investment decisions. Here are some guidelines for those seeking alternatives to the traditional deposit account.
1. Investors should seek investments tailored to fit their personal circumstances. The investment choices that may suit those close to retirement are not the same as those that are right for thirtysomethings.
Before making any decisions, potential investors should sit down and consider a number of fundamental issues such as the amount of risk they want to assume, the length of time they want to invest for, the kind of return they expect from their money and whether or not they need an income from their investment.
2. Those who need advice should seek it from reliable sources. It is readily available from a number of quarters, including banks, insurance companies, stockbrokers and independent financial advisers.
However, would-be investors should be aware that they are likely to have to pay for truly independent advice. Most people shop around before buying a car or washing machine so it is no harm to canvass a range of opinions before making a decision on important issues such as savings and pensions.
3. The risk/reward equation is at the heart of all investment. The higher the risk, the greater the potential reward. But before plumping for high-risk investments, investors should know that they can equally lose their money.
They should also be able to live with the uncertainty that is often involved in risky choices. To determine your attitude to risk, investment advisers suggest the surprisingly simple "sleep" test - if you lie awake at night worrying about your money, it is not for you.
4. The longer the investment term, the greater the likely reward. Although investors are advised to keep some liquid cash to cover everyday needs or unexpected emergencies, the best bet is to think long term. It generally pays to let your money sit and ride out the ups and downs of whatever market you are invested in.
Equally, investors should not panic at the first sign of trouble. At all costs, avoid having to cash in an investment at short notice. Forced sales are usually done at a discount.
5. Investors should not put all their eggs in one basket. Most are best advised to spread their investments across the different asset classes so they have a mix of equities, cash, property and bonds.
Even within a single asset class, investors should spread their risk with a geographical mix, for example. If you have a preference for shares, you are better off holding not just Irish shares but some European or US shares as well, while spreading your investment across sectors is also advisable. Including some solid blue-chip banking stocks alongside that riskier high-tech investment may be a good idea.
6. Cash - or money on deposit - is the best known asset class. However, its attractiveness has fallen as deposit rates have been cut in a low-interest rate environment. Investors should have access to some liquid cash on deposit for emergencies.
Those who choose to have more cash for the absolute security and instant access it provides should shop around for the best rate, with longer-term deposits usually providing better returns than demand deposit accounts.
However, for those who can afford to lock money away for some time, it may make sense to explore some higher-yielding investment instruments which offer capital guarantees such as tracker bonds, guaranteed unit funds or with-profit funds.
7. The implementation of some of the recommendations of the Bacon report has made investment in residential property less attractive to the private investor. However, falling mortgage interest rates and rising rents mean there is still money to be made in this area and has coaxed some private investors back into the market.
There is a number of other options for those who have a soft spot for investing in "bricks and mortar". They could consider joining a consortium and investing in commercial property, which has also been enjoying a boom. Alternatively, they could consider buying property overseas with Belfast, London, Spain and Florida among the destinations which are attracting growing interest from Irish investors.
8. Equities have traditionally provided investors with the best returns although they involve a greater deal of risk than cash, bonds or property. Just as markets rise, they also fall and the investor can as easily lose his money as double it.
However, there are a number of less risky equity investment vehicles such as with-profit funds or managed funds while the longer the investment term, the more likely the investor is to ride out the ups and downs of the market.
Most stockbrokers recommend their private clients consider the more reliable blue-chip stocks with a track record of good earnings growth, although those who like to live dangerously may want to include more high-risk stocks, such as high-tech or exploration shares, in their portfolio.
9. Providing for retirement is among the most neglected, but also the most important, areas of personal finance. Self-employed people should consider taking out a personal or self-employed pension plan into which they make regular payments which are invested on their behalf. Employees can invest in company pension schemes which allow them to claim tax relief on earnings invested to improve their pensions.
People are advised to start contributing early to a pension fund as the cost of providing a pension rises dramatically as people get older.
10. If it all goes wrong, there is a small army of regulators overseeing various aspects of the industry. Among those to whom the wronged investor can turn to for help are the Director of Consumer Affairs or the various industry ombudsmen, depending on the type of investment involved. However, investors should always be vigilant, they should retain a healthy degree of scepticism and never be afraid to ask questions. Receipts should be demanded for any funds handed over and those offering above-average returns should be treated warily. At the end of the day, it is your money and your future that are at stake. (Series concluded)
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