There is nothing like an impending event to whip up an advertising frenzy. As we approach the end of the tax year, the investment houses move into over-drive to encourage us to invest money in a penny stock alerts and Shares ISA.
Stocks & Shares ISAs differ from Cash ISAs in that they are ‘investment’ products as opposed to ‘savings’ vehicles. Their aim is to provide returns higher than those you would get from monies in a deposit account or Cash ISA. But because investment volatility and investment returns go hand in hand, they are by definition riskier than their Cash Cousins.
Before you consider entering into an investment product there are factors to take into account. Here are some of them:
1. Do you have an emergency fund?
Always work on your emergency fund before you consider long term investment. You should aim to have three months household salary in a deposit account.
This account should be accessible at short notice, and also completely free of risk. This means that should an unexpected expense arise, you do not need to rely on credit cards, the generosity of family or friends, and you do not have to raid long term investments.
2. When do you need to access your savings?
You should not invest money if you think that you may need to access it within five years.
The reason for this is that stock markets go up and down on a daily basis. If you invest for the short term, while you could obviously make money, you run the risk of putting the money in when the markets are on a high, and needing to withdraw when they are lower – this means that you would get back less than you have put in.
As a rule of thumb, five years + could give you sufficient time to ride out any dips in the market, and make up any losses.
3. Can you afford the investment risk?
For most people, the fear of loss is greater than the need to gain. Imagine if you find a £10 note in the street – it can cheer you up for a few minutes, before you go back to worrying about life in general. Whereas if you put £10 through the washing machine, it can actually put you in a bad mood for the rest of the day.
You should only take on investment risk if you can afford to. Make sure that you complete a proper Risk Questionnaire with your bank or financial adviser before putting money into a Stocks and Shares ISA.
If you are very risk averse, your adviser will probably recommend that you stick with deposit based Cash ISAs!
Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to contact Henrietta, email us on [email protected] and we’ll put you in touch.