What should you consider before investing?

You’re ready to start making some investments and you want to see them grow, but do you know what you need to consider first?

Answer these questions before deciding where to put your money.

Investors who take greater risk can achieve greater returns, but this isn’t always true. Taking on greater risks means you must feel comfortable with the possibility of potential losses.

You need to understand your own attitude to risk, and that might involve asking yourself what would happen if you lost some or all the money you have invested. Are you investing only a percentage of your savings that you can afford absorbing some risk on, or could you potentially lose your life savings if the investment didn’t work out?

How much time you have to invest and when you need to ‘cash out’ your investment is also an important aspect of your risk appetite.

If you want to take greater risk in the hope of greater returns, you may need to hold your investments for longer - perhaps five or 10 years - to try and give it an opportunity to grow.

A good example of this is investing in shares. Over the short term, some shares can be very volatile in reaction to factors such as market conditions, the political environment, and company news. But since stock market indexes generally grow over time, being invested longer term can give your shares a better chance to grow.

Having all your eggs in one basket is seldom a good idea, so when considering where to invest, are you focusing on one, or more than one, investment vehicle? Holding shares in only one company, or a basket of businesses in a single sector such as technology, can leave your investment open to additional risk.

Diversifying your portfolio by spreading the risk across different assets and asset classes instead is a useful way to reduce the risk.

Diversification is not a guarantee of investment success, but it can help to protect your portfolio by spreading the impact when some of your assets don’t perform well.

Staying with the example of shares, if you invest across a spread of, for example, healthcare, technology, and property, and one of those sectors underperforms, it’s more likely to affect only the portion of your portfolio allocated to that sector, rather than your entire investment. That’s the core benefit of diversification.

A well-diversified portfolio should include different asset classes with different levels of risk. For example, options available to retail consumers include:

• Shares, which tend to have the highest potential for growth but at a higher risk.
• Bonds, which in some cases are classified as carrying less risk in comparison to shares, but still carry risk, especially in changing interest rate environments.
• ETFs, which offer exposure to a broad range of assets and sectors, combining diversification with relatively low fees, though they also still carry risk, depending on their underlying investment holdings.
• Cash, where your investment is most secure but likely to get the lowest returns.

There are other assets that can be considered, such as commodities and real estate, and which you choose may depend on the complexity of your strategy, but because diversification can be complex, you should always seek the help of a suitably qualified financial adviser to help you understand your options and the related risk.

When you invest in shares, and they do well, you may benefit from both income and capital gains. That could attract tax, and in the UK, you may also be charged stamp duty on your initial purchase.

There are, however, some tax-efficient products that can help limit your tax liability:

• ISAs: Shares bought as part of an Individual Savings Account (ISA) are exempt from capital gains and income tax. A Cash ISA is like a bank savings account, while a Stocks and Shares ISA invests into a broad range of assets with the aim of achieving higher growth. In the UK, you can contribute up to £20,000 across your ISA accounts per financial year.
• Pensions: Investing in a pension fund can lead to some tax relief from the UK government, but you can’t access the money until you’re 55. At that point you can take 25% as a tax-free lump sum.
  Self-Invested Personal Pensions (SIPPs) offer the same tax advantages as other pensions, but you have more input in the choice of the underlying assets your money will be invested in through the pension fund.
• VCTs: Venture Capital Trusts (VCTs) are listed on the London Stock Exchange. They invest in a range of small, early-stage companies and are relatively high risk. While they can lead to some tax relief, the tax rules can be complicated, and you should speak to your financial adviser before investing in these.

Tax on shares can be extremely complex. Always seek advice from experts such as financial advisers, accountants, and HM Revenue & Customs.

When you buy and sell London-listed securities, you have to use a broker certified by the Financial Conduct Authority (FCA).

Financial markets provide a platform for you to buy and sell assets like shares, bonds, currencies, derivatives and even physical products like commodities.

London Stock Exchange offers a marketplace for those securities.

There are various types of brokers offering different services and charges:

• An execution-only broker buys and sells shares on your behalf according to your exact instructions. They charge a commission on the trades you make. Note that this service is best suited to experienced investors very comfortable with their investment decisions and strategies.
• An advisory broker buys and sells shares on your behalf and will give you advice on the decisions you’re making, for a fee.
• A discretionary broker can buy and sell the securities you want but will also have the authority to make investments without your prior approval, to meet your financial goals. This has the benefit of making trades faster and grabbing opportunities when they arise. Many of these firms now include financial planning as part of their services, also for a fee.