Save or invest
You’ve sold your business and are now planning for the next stage of your life, whether that means retirement in the sun, helping the family out with its finances or even starting another business.
Whatever your aims, you need to consider how best to protect and grow the money you have made. There are two main options open to you: saving the money in a bank account and investing in the stock market.
Both have their benefits and risks. Savings will keep your money secure, but the value could fall over time because of inflation and taxation. Investing comes with more risk due to the volatile nature of the stock market but provides a greater opportunity for growth and income over the longer term.
Shares have risen
History suggests that investing in stocks and shares, rather than leaving your money in cash, has been the best way to grow your money in real terms over the long term. Yet it would be a mistake to view this as an either-or decision.
“Regardless of whether interest rates are high or low, you should have a comfortable cash cushion to meet short-term needs and give you the peace of mind to take more risk with any money you've invested for the longer term,” says Phil Woodcock, Head of Investment Communications at St. James’s Place Wealth Management.
“Inflation may be low today but it's a constant threat to the value of your money and very few savings accounts are offering inflation-beating returns. The delay to Brexit may have pushed back any interest rate rises to the second half of 2020, so there is little respite for cash savers. Just as when you were in business, you need to take some risk with your capital if you are to achieve a decent return.”
How to invest
But where do you begin on the investment path? The answer is to start with safety.
“There is no hard and fast rule, but you need to be comfortable that you can meet any expected, or unexpected, short-term expenses from cash," says Woodcock. "That way, you can avoid the need to cash in long-term investments at what might be the wrong time, for example, when markets have fallen. It's worth keeping six months' worth of income requirements readily available.”
As for the shape of your investment strategy, you must start with the end in mind: what do you want to achieve and when?
“Do you need income now or in the future when you retire?” says Phil. “Are you saving for another specific purpose such as your grandchildren’s education or to buy a second home? With that focus you can then work out the plan needed to meet that goal.”
The main investment options are shares, bonds, commercial property and alternatives such as gold, timber and other commodities. You can access these most easily via an investment fund, which pools your money with other investors and spreads your investment across different regions, economies, hundreds of individual companies and other assets.
“You should spread your investments as widely as you can to manage the risks. That way, while they may not all be going up at the same time, they are unlikely to all be going down at the same time either,” he says.
Accepting risk
Yet investing is risky, and your holdings are likely to be buffeted by economic and political uncertainties both at home and worldwide. New trade tariffs can hurt share prices or, in extreme cases, holdings could be wiped out if a business goes into administration. Property prices could plunge, or a government could collapse, hitting bond values.
A financial adviser can help you determine your attitude to such risks and how that will affect your investment strategy.
“You need to understand your capacity for loss – in other words, how will you react to a market fall?” says Woodcock. “How achievable are your goals based on the level of risk you’re comfortable taking? It’s also possible that you may have different risk thresholds depending on what you’re investing for. For example, you might be prepared to take more risk with money you’re investing long term for grandchildren, compared to money needed for your own retirement in five or 10 years’ time.”
Your age can also affect your strategy, since your risk tolerance reduces as you get older.
“You might be tempted to invest in areas like emerging markets that have the highest return potential,” says Phil. “However, that comes with increased risk of short-term volatility. As you get older, you have less time for your investments to recover significant losses, so it normally makes sense to rein in your risks as you approach retirement.”
Your personal goals should always be central to your financial decisions. By managing your cash well and taking some investment risk, you can both protect yourself and give your wealth a chance to grow.
“By investing in assets like shares for the next 10 or 20 years, you may greatly improve the chances of being better off than you are today,” says Woodcock.
Past performance refers to the past and is not a reliable indicator of future results.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Source: St James Place May 2019