Investing could be a crucial part of your financial plan as it may allow you to achieve more impressive growth over time. Ultimately, this might mean that you’re more able to achieve your financial goals in the future.
To be successful in investing, it’s important to think carefully about what your aims are and how much risk you can afford to take to achieve them. This might appear obvious – you may assume the main purpose of investing is always to build as much wealth as possible.
However, while it’s important, growth isn’t the only factor to consider. In fact, if you only focus on your returns without weighing up other important aspects of investing, you may find it more difficult to achieve your objectives.
Read on to learn why it’s important to look beyond returns when investing.
You may want to consider the level of risk you are comfortable with and can afford to take
Investing normally requires you to adopt some level of risk and there is a chance that you could lose value on your invested wealth.
Everybody has a different risk profile. That’s why it’s crucial to consider not only how much growth certain investments might offer, what level of risk they carry and how much risk you can afford to take.
For instance, you may purchase bonds, which essentially means you give a loan to an organisation, and they agree to pay you back with interest after a certain period of time. Bonds typically pay a fixed interest rate for a set period and may be considered a “safer” type of investment. If you hold your bonds until maturity, you can predict how much your money will grow.
While you could experience losses if you sell bonds for less than you paid for them, you might not adopt as much risk as you would have if you had invested in the stock market.
This is because market fluctuations could affect the value of your portfolio, especially during a period of political or economic upheaval. For example, events such as the 2008 financial crisis or the Covid-19 pandemic caused markets around the world to fall.
That said, you may also benefit from upward market movements, meaning that you could achieve more growth from stock market investments than you would from bonds. You might have heard the phrase “high risk, high reward” before – and while not always true, this is typically the balance that stock market investors aim to strike.
With all this to consider, it’s important to find a balance between risk and growth to consider what you are personally comfortable with and can afford to take.
If you put all your wealth into a few high-risk investments that have historically delivered large returns, you could be more vulnerable to market volatility. As a result, chasing the highest possible returns without considering risk could mean you experience unexpected losses and face financial stress.
Conversely, if you are overly cautious and only opt for low-risk, low-reward investments, you might struggle to achieve meaningful growth, making it harder to reach your savings targets.
A successful portfolio combines a range of investment types with varying risk levels, which react differently to certain economic conditions. This kind of diversification could provide protection against uncertainty and ensure that your portfolio continues growing in the long term.
Our video guide explains risk and diversification in more depth and will help you understand the importance of balancing your portfolio.
The length of time you plan to invest for is a crucial factor
When creating your portfolio, you may want to consider your specific goals, as these will determine when you need to access your wealth. For instance, if you want to retire in 10 years’ time, you may wish to start decumulating your portfolio at that point.
This is important because the level of risk you adopt, and the returns you are likely to see, may change depending on how long you hold investments for.
For example, the stock market could experience regular periods of volatility, meaning you see short-term losses. Yet, in the longer term, you may be more likely to generate positive returns, however, this is not guaranteed.
On the other hand, if you’re investing for short-term to medium-term goals and plan to access your wealth in the next few years, stock market investments may not have enough time to recover from periods of volatility.
Instead, it may be more sensible to invest in bonds or hold wealth in a high-interest savings account. This could mean that you’re less vulnerable to volatility and may be less likely to experience significant losses before you need to access your wealth.
All this to say, your time frame is an essential factor to establish before you begin investing. Your goals, and when you want to achieve them, are likely to dictate how much risk you take on and how much wealth you invest in the first place.
You may want to make investments that align with your investment preferences
As well as the level of risk you adopt and the length of time you want to invest, you might consider whether you have any particular investment preferences when making investment decisions (i.e. do you prefer to invest in an ethical manner or in a particular geographical region or business sector).
Get in touch
Considering all the above factors rather than only focusing on returns should mean that you’re creating a truly bespoke investment portfolio to meet your needs.
We can support you in building a portfolio that helps you achieve your unique goals.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
