How do you make an income strategy work for your risk appetite, timeframe and needs? Freelance writer Rosie Murray-West lists the questions you need to ask yourself
If you’ve decided to seek income through your investments, you’ve already come a long way.
However, there is a little more to do. You’ll need to take into account your lifestyle, financial position and strategy to ensure your investments work for you.
Here are 10 of the most pressing considerations:
1 What is my timeframe?
Investments should be made with a long-term time horizon in mind. Think about stock-market volatility: share prices go up and down. If you are going to need your money at a given point in time, you may get back less than you’ve invested – even with an income-producing strategy.
In general, the amount of risk you should take with your investments normally increases as your timeframe lengthens but this depends on your individual circumstances and financial position. So the investments you would use to save for the deposit on a house in eight years’ time would typically be less risky than those designed to fund retirement 20 years down the line.
2 What is my risk appetite?
Not everyone has the stomach or financial capability for risky investments. Financial advisers ask a range of questions to determine an individual’s risk tolerance. If you’re investing on your own, you need to ask yourself how much you are prepared to risk for potentially greater gain.
3 What return do I expect to achieve?
Risk and reward tend to be intertwined, with higher-risk investments likely to lead to higher returns. Ask yourself what level of returns you want from your investments. If your expectations are high, you should consider taking greater risk. This is a dilemma where professional financial advice is helpful.
4 How much income will I need to maintain my lifestyle as I get older – and do I have any other means of earning it?
If you’re saving for retirement, look at your probable outgoings. This may prove something of a wake-up call. Your pension savings will need to generate a substantial income to keep you in your later years – unless you have other sources of income. A sober assessment may prompt you to save more now – or possibly consider part-time work in retirement.
5 What types of investment are available to me?
There are several tax-efficient ways to save. Picking the right one will make a big difference to your investments.
For retirement savings, pensions still offer significant tax breaks. ISAs allow your money to grow in a more flexible, tax-efficient manner – without you being taxed when you withdraw it.
Other vehicles, such as trusts, can be particularly beneficial if you are saving for grandchildren. Again, a specialist financial adviser will be able to help you.
6 Where am I invested?
Placing all of your eggs in one geographical basket is a bad idea for most investors. If that region begins to struggle, you lose disproportionately. Instead, it is sensible to spread your investments across a mix of developed and – depending on your appetite for risk – emerging markets to create diversification and hopefully stability.
Investment experts can help ensure that your diversification is real – rather than just appearing that way on the surface – with exposure to a spread of different global regions, asset classes (such as equities, bonds, property), industry sectors and companies that react differently to global economic shifts.
7 What is the foreign-exchange and inflation impact on my investments?
It is easier than ever to have investments around the world, but in doing so you lay yourself open to the fact that currencies move against each other – meaning performance may be affected. Taking this into account should encourage you to build diversified investments. You could also consider funds that try to negate currency risk. Factoring in inflation when considering investment goals is also important. Remember that as the price of goods or services rises with inflation, so the purchasing power of your savings and investments declines.
8 What asset classes am I invested in?
Equities, bonds, property, and cash – known as assets – vary in behaviour in different economic cycles. Ensure you have a diverse mix of assets or you risk unnecessary volatility. A good multi-asset fund is one way to achieve this, or choose a range of specialist funds in different regions and asset classes.
9 Who’s managing my fund?
Expert fund managers earn their fees by actively managing funds (buying and selling assets) to try to outperform the market. You can check their track records on the factsheets associated with their funds. If they’ve moved from another company, research how their former funds performed, too. Past performance is, of course, no absolute guide to the future.
10 How often am I reviewing performance?
It’s not enough to pick investments to create income and leave them to get on with it. Successful investors review their funds and goals regularly. There is good reason to do this. It is easy for your investments to become unbalanced, for example if one fund grows in value disproportionately to others.
Equally, your goals may change over time – if you have children or are left an inheritance, for example. This could affect your risk appetite or investment timeframe.
A quick look over your investments every six months – and a longer perusal of performance and goals every year – should help ensure you meet your investment goals.
And... a little help
If all this sounds daunting, you may feel you need extra guidance. Many people choose to use a financial adviser at key points in their lives – when they get married, approach retirement, or have a child – to help them to further check their investments.
Try the Personal Finance Society www.thepfs.org/yourmoney
to find an adviser to suit your needs.
Rosie Murray-West was, until recently, deputy editor of the Telegraph Money section and before that the newspaper’s Questor Editor. She now writes regularly for a variety of publications including the Telegraph, Times, Sunday Times, Mail on Sunday, Observer and Moneywise magazine, covering all aspects of personal finance, as well as business, property and economics. She was named Financial Freelance Journalist of the Year (runner up) in 2015 by Santander, and won the Santander Award for Personal Finance Education in 2011.