If you have some money to invest (and that can be anything from a few thousand pound upwards) what do you need to consider before you get to the actual investment decisions?
This is fairly basic stuff, and the process should be the same whether it is a few thousand pounds or hundreds of thousands.
1) do you seek income or capital growth?
2) what is your attitude to risk and capacity for loss?
3) when will you or might you want to cash in ? and for what purpose?
4) into what kind of “package or tax wrapper” should the money be invested?
Taking these in order
1) If you seek income how much do you want ? Is that a reasonable amount or will you need to dip onto any profit to top up to that level, or even deplete the capital.
Will the natural income that the investments generate be sufficient ? If you seek growth is it relevant to you whether that comes from reinvested income (net of income tax) or by pure growth. if you are going for growth, and succeed how do you control the build up of a tax liability on the profits. What are the tax implications of the income or growth versions.And remember it is not a black and white choice. The ideal for many of us would be income and capital growth.
2) All investments carry risk. You may think that your money in the bank is risk free, but you can be fairly certain that the £1,000 that is still there in 5 years time will not buy as much as it would today – in this case the risk is to the buying power of your capital. These days inflation tends to exceed interest rates so even if you reinvest the bank interest you are still not standing still. In the past this situation has been the reverse and no doubt will be again sometime.
At the higher end of the risk scale if you invest in the stock market you may do very well and see you money grow in value above inflation and interest rates, or face losses due to poor markets or bad investments.
My process is to invite my client to complete a simple questionnaire which i feed back into my PC which gives a risk score on a scale of 1 to 10/10. this is then the starting point of a conversation which should end up with a “score” with which my client feels comfortable.
Is the income from this money absolutely essential, or a nice extra ? Is it important that you avoid any losses on the original capital?
3) Is the money wanted as a deposit for a mortgage, or to buy a car of for a holiday?
Or is aimed at a top up to long term savings?
If it is wanted in the relative short term, or to meet a particular need in the medium to longer term those objectives will need to be taken into account in the investment decisions.
4) Would you like the money to be tax free ? That might point you at using ISA’s.
Do you want to top up your pension ? do you want to avoid inheritance tax with this money? Would you like the tax man to top it up as he will with pensions, the new LISA next year, Venture Capital trusts, Enterprise investment schemes etc.?
Do you want to simplify the tax management of funds that might otherwise trigger income or additional income tax or capital gains tax?
All of this, and other considerations that these for headings might generate need to be dealt with before we even consider which investment wrappers and funds to use. That will be the subject of my next post.