Financial fitness, Step two: Stay motivated
Once you’ve worked out what your financial objectives are, your next challenge is to create a training plan to deliver your goals. Finding the right investments to help you meet your targets is not just a quick fix; you’ll need staying power if you want to stay on top of your game. In the second of our four-part guide to becoming financially fit, we offer our tips to help you keep on the right investment track.
When choosing investments, your first step should be to work out your attitude to risk.
There are three common types of investor; those who have medium-low appetite for risk, those who take a moderate approach and those who are prepared to accept a medium-high level of risk. If you’re not sure where you sit on the risk scale, find out more about managing risk and investing efficiently.
Understanding your approach to risk can help you work out the best way to divide your investment money between various asset classes such as cash, bonds, property, and shares.
For example, if you are risk-averse, you may decide to hold all or a larger proportion of your portfolio in cash, or fixed interest investments, such as gilts and corporate bonds. If, however, you are comfortable accepting a much higher level of risk of loss, you may be prepared to venture into more speculative investments, such as smaller companies or emerging markets.
The importance of diversification
Whatever your approach to risk, it’s important to try to build a portfolio that isn’t top heavy in one particular area. Try to spread your investments across a range of different assets, sectors and geographical areas. At any one time, some of your investments are likely to perform better than others; some might gain and others lose. The hope is that with a diversified portfolio, the performance of the strongest investments should offset the performance of the weakest, leading to more consistent overall returns.
One way of spreading risk is to invest into pooled funds, such as open-ended investment companies (OEICs) and investment trusts. These are managed by professional fund managers who invest in a wide range of different companies on your behalf. This can help to reduce your exposure to failures or setbacks in any one company or area. If you are unsure about which investments to choose, seek independent advice.
Do plenty of research
When you exercise, you need to do plenty of warming up to make sure you don’t do yourself any damage. It’s the same with investing – if you dive in without doing any preparation, the risks of coming unstuck later are much greater.
You should therefore always do lots of research before you invest, and think carefully about the risks involved in any investments you are considering.
The good news is there are plenty of resources available to help:
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