What are your reasons for investing?

What are your reasons for investing?

It’s important to know why you’re investing. The first step is to have a good think about your financial situation and your reasons for investing.

For example, you might be:

  • looking for a way to get higher returns than on your cash savings
  • putting money aside to help pay for a specific goal such as your children’s education or their wedding
  • thinking about retirement.

Thinking about your reasons for investing now will help you work out your investment goals and influence how you manage your investments in future.

What are your investment goals?

You’ll need to give some thought to your investment goals. There are two main options:

If you’re looking to build up the value of your investment over time, you’re investing for growth

Investing for growth means buying investments that are expected to increase in value over time. You can do this with funds or with shares.

Funds – a simple way to get started

You can do this by investing in accumulation units of funds, or if you have a large portfolio and you’re open to more risk, through individual shares. If you're new to investing, funds can be one of the simplest ways to get started. Funds invest your money in a carefully selected range of assets, such as shares, bonds or property, which means you’ll 'own' a small proportion of a wide range of individual investments. This is known as diversifying and can help spread potential risk in a way that buying shares in one company can't.

There are thousands of funds available, each with its own objective and level of risk – for example, ‘invests in large UK companies’ or ‘invests in US companies’. A Fund Manager will choose where to put your money, so you benefit from their experience too.

Growth investing with shares

Another way to invest for growth is to buy individual stocks and shares, sometimes known as equities. Here, the aim is to grow your money by investing in profitable companies whose share prices rise in value, or that pay dividends to shareholders. If you’re going for long-term gain, you can reinvest any dividends by buying more shares, – but you also have the option to keep them as income.

Putting all of your money into one company is very risky. If the company performs poorly, the share price drops and you could lose some or even all of your money. It makes sense to diversify your portfolio across a number of companies and invest in different types of assets. Funds are the easiest way to achieve this. They allow you to hold shares in a large number of companies through a single investment, and you benefit from professional managers choosing the individual companies on your behalf.

Many equity income funds pay dividends, although they aren’t guaranteed and the amount paid out can vary from year to year. Individual shares are generally only considered appropriate investments for experienced investors.

Investing for growth vs. investing for income

Investing for growth means buying investments that are expected to increase in value over time. Let’s say you have £10,000 to invest. If you invest for growth, your goal may be to turn that £10,000 into £12,000. You’re not looking to make a regular income from your investment, instead you’re looking to receive a larger long-term gain.

If you invest for income, you’re not expecting the amount that you invested to grow into a larger amount. Instead, you’re aiming to make a regular income from your £10,000.

How long should you invest for?

 

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