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Investing 101: #3 Invest Smarter

For most people, investing can form part of a bigger financial plan. It’s a tool that can be used to help make your money work harder and help reach important financial goals, like putting your children through college, helping them onto the property ladder or securing your own home and helping build your retirement nest egg.

With such important ambitions driving your investment goals, it’s important to create a plan that’s tailored specifically to you.

Your plan should take account of things like the time frames you’re most comfortable with, your attitude to risk and affordability – because you don’t want to have to dip into an investment pot every time you need a little extra cash.

Setting goals

arrow sign against coloured wall

Setting measurable goals and writing them down is a valuable exercise because it can help you make distinctions between short-term financial needs and long-term goals.

Peace of mind is important when it comes to investing too, so you need to be confident your income can cover things like fixing or upgrading your car, paying for school trips and replacing household appliances, without stressing about the money you have tied up.

Once the everyday is boxed off, you can think about investing in something that will help you build future wealth.

It’s a good idea to look at your investment goals alongside any other financial arrangements you’ve made. That way you’ll be thinking in terms of the bigger picture and you can link specific financial plans to individual goals, for example:

  • A deposit savings account… for the family holiday
  • A pension… for retirement
  • Investing… for a holiday home in the sun

It’s about assessing where you are, where you want to get to and charting the course that will hopefully get you there.

Risk

hands holding paper with charts beside mobile phone

Understanding your tolerance for risk is essential before you embark on any level of investment. You can’t put a price on peace of mind and anything that causes undue stress or keeps you awake at night isn’t just a bad idea, it’s completely unnecessary, because there are opportunities for every risk appetite.

It stands to reason that lower-risk means lower potential losses, but low-risk portfolios also come with limits on potential gains. So, it’s about weighing up what’s more important and what you can live with - the likelihood of small, incremental gains in less volatile markets, or the chance of big returns and the higher risk or similar losses in faster-paced, changeable markets? It’s your call entirely.

Financial advisors can help you decide where you feel most comfortable and there are lots of free online tests and quizzes to help get your head around the idea of risk and what it means in very practical terms.

The important thing to note is that no one can (or should) decide your risk appetite for you.

Lump sum and regular investing

purple water raindrop

Investments also vary in terms of the way they’re funded. Some suit people who have a lump sum and are happy to invest everything in one go, while others work for people who prefer to drip feed and make regular investments of say, a couple of hundred euro each month.

The key is doing what you can afford. If the lump sum was earmarked for other things and you might end up needing it back (and possibly incurring an exit fee), it might be wiser to invest a smaller amount or think about a drip feed approach that would allow you to invest the full amount over time, without giving up the cushion you’d get from holding some back.

Finally, remember your investment goals and even your risk appetite can change over the course of your life and your financial plan should be revised if or when your needs change.

Knowing yourself and tapping into your gut will only add to solid financial planning, so don’t underestimate their importance and always take enough time to get right with how you feel before you invest.

Learn more

It’s important to understand the different asset classes you might be investing in. Article #4 in the Investing 101 Series explains each of these in detail.