Once the decision has been made to invest the next big question is how to invest? The Sunday press money sections are packed with opinions, options and advertisements, all purporting to have the answer. The two main choices are to self-select investments, predominantly online or by discussing the options with a qualified adviser. Both have their benefits. Doing it yourself will cut down on costs and potentially reduce administration. The advised route will give you the comfort that a professionally qualified adviser has considered your individual situation and come up with solutions appropriate for your current and future needs.
The next important step is to look at how to invest. There are two main investment approaches to consider, passive and actively managed. As the names suggest a passive fund will ‘track’ a particular stock-market or markets whilst the actively managed will have a fund manager reviewing and changing the construction of the investment on a regular basis. As you would expect, the passive funds do not charge as much management fees as the actively managed, but many people are prepared to pay that additional cost to potentially obtain better returns.
Finally, where to invest which introduces the concept of asset allocation and diversification. But what do these terms actually mean?
Asset allocation makes sure you have the right mix of stocks, bonds, cash other investment opportunities such as commodities and property to name just two.
Diversification is a strategy to make sure that your investments in stocks and other asset classes are not concentrated in a certain type or area.
It is important to remember that risk can never be completely eliminated. The key is to find a happy medium between risk and return that helps you achieve your financial goals while still getting a good night’s sleep.
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