You’ve got some money to invest, but you’ve never ventured into investment territory. What should you be doing? Money muse Lorraine Donegan’s has some tips.
When you think of “investing”, what jumps to mind? Flashbacks to the national disappointment of Eircom shares? Your gran muttering “stick it in the credit union” as you counted your communion money, or images of men in flashy suits shouting at each other like in The Wolf of Wall Street?
Whatever your general perception, I can assure you that the reality of investing is totally sensible. Simply put, investment is the process of buying shares in a company that you believe will increase in value over time. This can include buying shares, or “equity” in just one company, or buying into a bunch of companies, through what’s called a “fund”. The concept is straightforward, but in practice, it can be a very confusing and frustrating exercise. We have long memories in this country, and knowing what happened to people who owned bank shares in 2008 or even Eircom shares way back in 2003, has left a bad taste in people’s mouths.
To avoid a bad investing experience, here are my tips to get the most out of your money:
1. Know exactly why you are investing
Don’t be vague about it! If you’re only investing because you vaguely “want your money to grow”, then how do you really measure success? From the outset, decide whether you’re investing to save €X as the deposit for a house, or for your kid’s education, your retirement, or that dream holiday home. That way, your financial advisor will be able to plan accordingly, matching your investment approach to your goals.
2. Look for the magic word – compounding
If your investment “compounds” annually, this means that there is an exponential increase in the value of your investment year on year. Why? Because you earn interest on both the original amount and its accumulated interest. So, if you invest €5,000 at 5% interest per annum, after year one you’d have €5,250, which would get rolled into year two. At the end of year two, you’d have €5,512.50, etc. Take it from me, compounding is beautiful in its simplicity and magical in its results!
3. Know your risk appetite
There’s not much point in putting your money into technology investments if you can’t handle the thought of losing money! So, before you invest in anything, ask your financial advisor to complete a risk/reward assessment on you. That way, whatever choice you make, you’ll be comfortable with it.
4. Make sure you don’t pay too much in fees
Apart from buying and selling at the wrong time, which is usually driven by fear or greed and by people who don’t have a financial plan, fees are the biggest barrier to a successful investing experience. Make sure you are paying as little as possible.
How? Ask your advisor questions such as:
- How do you get paid on this investment?
- What are the “all-in” costs and taxes associated to this investment?
- Exactly what fees are linked to the lifetime of this investment and how do they compare in the market?
5. Work with a fee-based advisor
Like many things in life, tips 1-4 above are easy to say but difficult to do, particularly for the uninitiated. As a result, my final tip is that if you’re an investment novice, or have been burned in the past, find a fee-based financial advisor that you can trust and pay them to do the ground work and guide you along the way. That way, you’ll make the most of your money.
Take the plunge! In today’s world, investing is the only real option for the prudent saver, so it’s something you really need to learn about. Best of luck!
Lorraine Donegan, aka the Money Muse, is CEO and founder at Donegan Financial Services. If you’d like to ask any specific questions about any finance-related topic, email [email protected]