INTRODUCING INVESTMENT

PLANNING YOUR INVESTMENTS

You may have a lump sum to invest which you would like to see grow, or from which you wish to draw an income. Equally, you may decide to invest in instalments, (for example, on a monthly basis) with a view to building up a lump sum.

Your investment goals should determine your investment plan and the time question: - "How long have I got before I need to spend the money?" - is crucial.

Generally, the longer it is before you need your money, the greater the amount of risk you are able to take in the expectation of greater reward. You don't want to find yourself having to sell just when the price has fallen. If you plan to spend the money soon, say in a few years, perhaps to celebrate an anniversary, or if you are nearing retirement and are planning to take an immediate income from your pension fund, you will want to safeguard the value of your money.

WHAT IF...

My circumstances change and I have less time to invest than I had anticipated?

It is an idea to monitor your portfolio regularly in order to assess whether your original needs are still valid.

If you find that your requirments have changed, you may need to alter your asset mix to accommodate your new objectives.

Generally, the less time you have before cashing in you investments, the less risky your holdings need to be.

DECIDING ON THE BEST MIX

The value of shares goes up and down in the short term, and this can be very difficult to predict, but long term they can be expected to deliver better returns. The same is true to a lesser extent of bonds. Only cash offers certainty in the short term.

Broadly speaking, you can invest in shares for the long term, fixed interest securities for the medium term and cash for the short term.

As the length of time you have shortens, you can change your total risk by adjusting the "asset mix" of your investments, - for example by gradually moving from share investments into bonds and cash. It is often possible to choose an option to "lifestyle" your investments - this is where your mix of assets is risk-adjusted to reflect your age and the time you have before you want to spend your money.

Click here to see potential asset mixes for investing for retirement and the type of mix which may be appropriate for some other goals.

Managing this mix is a skill. It requires a high level of numeracy, a good understanding of why and how the value of investments can change, the presence of mind not to be swayed by every bit of news you hear, and the ability to be objective. It also takes time, if only in administration.

If you are unsure, talk to a financial adviser with the investment skills to help you. They can help you to decide on your initial investment and help to rebalance it as your circumstances or market conditions change.

DO YOU NEED INCOME NOW, LATER OR NOT AT ALL?

Income can be in the form of interest or share dividends. If you take and spend this income, your investments will grow more slowly than if you let it build up by reinvesting it. By not taking income you will earn interest on interest and the reinvested dividends will increase the size of your investment, which may then generate further growth. This is called "compounding."

Click here to see the difference between taking income and reinvesting it.

The chart above demonstrates that if income from a UK All Companies Fund is reinvested over a 15 year period, the investment will be worth almost Ł1,000 more than if the income had been withdrawn. It also shows that shares significantly outperform cash investments in the long term.

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