How To Save And Invest Effectively
A host of saving and investment efforts fail to achieve their ends because of the use of wrong technique. There are simple steps that can be followed to enhance saving and investment. A fervent dedication to the principles discussed below can provide better returns whilst guaranteeing the investor's peace of mind.
It is crucial to embrace the idea that investment is a long-term saving process. Every investment involves some amount of risk taking, and money can be lost irrespective of how perfect an investment strategy is. Hence one golden rule to bear in mind is: invest only and only what you can really afford to lose. I hope you can infer from this concept that before you start investing (putting money that might not come back to you somewhere), you have to deal with certain basics. I am talking about things that will make you go through life comfortably in the short, medium and long-term, should the money you invest end up in a 'dingy black hole' - refuse to return. These basics are home and mortgage, emergency funds, pension, life insurance and your dependants.
Once they are in place, the ground is prepared for further saving or investment.
The next step is to clarify and specify your objectives for investment. You should decide whether, for example, you want to save to provide for income now or for future growth. Perhaps you opt to invest towards income during retirement or towards higher education for your children. Your objectives have to suit your personal circumstances - e.g health, family, and how long you want to invest. It is also necessary to understand your attitude towards risk and know just how much risk you are prepared to take. Having identified your objective and ascertained your risk tolerance, you can then put an investment strategy in place.
A research in 1999 uncovered about 30,000 financial products on the market, a figure which is bound to increase with the passage of time. The number of products that exist is not as important as the quality of choice the investor will make. In choosing a financial product, you should make the most of your hard- earned money. You should try to get a good deal, but not at the expense of grabbing a product that does not agree with your personal circumstances. Some seemingly cheap products don't always end up cheap in the end! Just make sure your money works hard enough for you. Avoid high charges as they eat into long-term returns and do keep your eyes open for hidden charges. Also be on the look out for withdrawal charges and the magnitudes of regular payments, and ensure they are satisfactory. Note that there are normally high penalty charges for early withdrawal especially in investment-based life insurance policies.
As aforementioned, risk forms part and parcel of investment and should not put off any investor. It should, however, be appropriately managed and contained as much as possible. It is essential to understand the risk attached to any product you choose and ensure it is within the comfort zone of the risk you can stomach.
With financial products chosen, and the strategy in progress, it is necessary to stand back from your investment, from time to time, and review it to establish how well the plan is functioning. Personal circumstances change at different stages in one's life, and call for related alterations in the investor's objectives, and hence investment strategy. Regular reviews will increase the chances of identifying malfunctioning securities and making timely and necessary adjustments. It will be rewarding to keep your eyes wide open on current market rates and move your instant savings around to earn as much returns as possible.
Every investor should protect himself as much as possible through all the stages in the investment process discussed above, in order to ensure success. It is true that that financial services in the UK have been very much reformed in recent times, and that the Consumers' Association and the Financial Services Authority are doing the best they can to ward of scandals. The onus is, nonetheless, on the investor to be on his guard against fraudsters and unscrupulous investment companies. The way to protect oneself is not to be blindfold before taking a plunge, and always remembering this: "if it is too good to be true, then it probably is!"
David Opoku
BA Hons. Accounting and Finance. (Currently specialising in Financial Advising/Stockbroking).