Is investing right for me? 5 questions to ask

Investing might conjure up images of The Wolf of Wall Street, but it simply means putting your money in places other than a cash savings account.

Investing can be a powerful way of growing your money, which is especially important in times of low interest rates. However, it’s vital that you invest in a way that suits your individual circumstances, and that you don’t put all your eggs in one basket.

If you’re not sure how to get started, a financial adviser can help. In the meantime, here are five questions to help you decide whether investing is right for you.

Have you paid off expensive debts?

You might be eager to start investing, but it’s usually wise to pay off expensive debts first. Credit cards, pay day loans and overdrafts tend to come with very high interest rates, often in the mid-teens. It’s unlikely the return on your investments will be greater than the interest you pay on these debts, meaning you’re more likely to be in a better position if you pay off debts first.

On the other hand, the average rate on a five-year fixed mortgage with a loan-to-value of 75% was just 1.69% as of 31 May 2021%¹. This is below the average annual return of the FTSE All-Share which, over the past 20 years, was 9.79% on a ‘total return’ basis (ie combining share price changes and dividend income). Bear in mind this is just an average figure – share price values go down as well as up, as the chart below shows.

FTSE All Share Total Return – 2001 to 2021

Source: Brewin Dolphin / Refinitiv Datastream

A financial adviser can help you decide whether you’re likely to be in a better financial position by investing your money or concentrating on paying off your mortgage. It’s worth noting that if you wait until your mortgage has been repaid before you start investing, there might not be much time for your investments to grow. Investing over the long term is especially powerful because of the impact of compound returns – where you get a return on returns as well as on your initial capital.

Have you built up emergency cash savings?

Before you start investing, make sure you’ve set aside enough cash to cover unexpected emergencies, such as a bout of unemployment, mending a broken boiler, or a replacing a leaking roof.

If all your money is invested, you could struggle to access the cash and end up resorting to loans or overdrafts. There’s also a risk that you’ll need to sell your investments when they’ve fallen in value, resulting in you making a loss.

It’s usually a good idea to have at least three to six months’ worth of cash set aside in an easy-access savings account, and more if you have any large purchases planned over the short term.

What is your attitude to investment risk?

Every investment comes with a degree of risk, and it’s important to understand and be comfortable with this risk before committing your money. In general, the higher the risk, the greater the potential return. But there’s also a bigger chance of losing some, or even all, of your money.

The stock market carries risk because returns are not guaranteed and your investments might fall in value. You can reduce risk by spreading your money across different asset classes, including shares, bonds, commercial property and cash, and across different sectors and regions.

How much risk you’re able to take on depends on a range of factors, including your financial situation and what your goals are. A financial adviser can help you decide the level of risk that’s appropriate for your circumstances.

How long do I intend to invest for?

You shouldn’t approach investing as a ‘get rich quick’ type of endeavour. The ups and downs of the stock market mean investing should be for the long term – five years at a minimum. This will hopefully give you enough time to ride out market volatility.

Before you invest, think about what you’re investing for. If you want to buy property in five years, pay your child’s university fees in ten years, or start building up a pot to fund your retirement, investing could enable you to grow your money and keep up with rising prices.

Do I have enough money to invest?

There’s a common misconception that you need to be a millionaire or an ultra-high earning executive to invest. This isn’t the case. As long as you’ve built up your emergency cash savings, you could start investing with a small lump sum or by putting aside some money each month.

Over the long term, even small amounts of money could grow into a sizeable portfolio thanks to the power of investment returns and compounding. Again, your goals, financial situation and attitude to risk will determine how much you can afford to invest.

Next steps

Taking control of your finances can feel daunting and, let’s face it, not hugely interesting. But the impact it can have on your long-term financial wellbeing makes it well worth doing, and it’s not something you want to get wrong. Taking some really good financial advice could make a real difference to you and your plans for the future. So why not speak to one of our financial advisers today?

¹ Bank of England – monthly interest rate of UK monetary financial institutions (excl. Central Bank) sterling five year (75% LTV) fixed rate mortgage to households, not seasonally adjusted.

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The value of investments, and any income from them, can fall and you may get back less than you invested.

Neither simulated nor actual past performance are reliable indicators of future performance.

Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations.

Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.