Investment strategies
What do you need to consider when you're working out your investment strategy? We take you through the basics.
Investing is all about creating the right strategy for you. It's important to establish your investment goals and the level of risk you're willing to take from the start. Here, we help you take control of your investment plans.
Identify your goals
Income versus growth
The first thing to think about when setting your investment strategy is to decide what you are investing for:
Income to supplement your earnings or boost your pension
or
Growth to meet a specific long-term goal, like buying a second home
Your life stage
Next up, you need to consider that your financial goals will differ at different stages in your life (and of course, you can have more than one goal):
- If you're young, your investment goal might be a deposit on a home, or being able to afford to take off time from your career to study, retrain or take a gap year
- If you have children or are thinking about starting a family, you may consider saving for school or university fees
- You may start thinking about creating an income for retirement.
Time frames
The length of time you have to meet your investment goal also plays an important role in shaping your investment plans, there are medium and long-term investment goals, such as:
- Medium-term five to 10 years (funding for education)
- Long-term 10 years plus (creating an income for retirement)
Work out how much money you'll need
Your investment strategy needs to reflect the amount of money you need to reach your goal.
You need to be realistic about the amounts involved, and whether they're likely to go up. This is particularly important for long-term goals, such as funding school fees and generating income for retirement.
Understand your attitude to risk
If you have goals with a timeframe of five to 10 years, such as a house deposit, you may not want to take much risk as your investments will have less time to recover from the ups and downs of the market.
If you're investing for your retirement over a longer period of time, you may consider taking more risk, but as you approach retirement, and have only a few years for your investments to recover if their value falls, you might want to take less risk with them.
Aim for tax-efficiency
Whatever investment strategy you follow, it should be as tax-efficient as possible. Investing via an ISA and investing into a pension both have significant tax advantages.
Example strategies
Deposit on a house: 5 years to save
Over this time frame, your money won't have much time to recover if there are dips in the market. Low-risk options might include Cash ISAs or investment bonds.
Secondary school fees
If you were investing to fund school fees from the age 11 and started when your child was born, your investments would have a long time to grow. You might consider investing in a Stocks and Shares ISA and/or investment bonds across a range of asset classes, choosing investments in line with your attitude to risk.
University education
If you wanted to fund your child's university education and started investing when they were born, your investments would have even longer to recover from any market volatility.
Including a higher proportion of shares in an investment strategy offers more potential for growth, but also the potential for greater losses. Or, you could start with a higher-risk strategy in the early years, then move to safer investments when you get to the latter years of investing.
Retirement
40 years to go
Investing via a pension is often the most tax-efficient way of saving for retirement. ISAs are another tax-efficient way of boosting your retirement income.
5 years to go
The closer you get to retirement, the less risk you might want to take with your investments. Moving from shares into bonds and cash-based investments is one risk-reducing strategy.
