The compounding effect is one of the most important aspects of investing for ones retirement and future. Compounding is the process in which the earnings from an investment are taken and then invested again into stocks, government bonds or real estate. For example, if you invested £10,000 into a stock and one year later, the investment is now worth £11,000 and have earned you £1,000. Instead of spending the earnings, you keep them in the investment.
After two years, the investment could be worth £12,100 and after 25 years, the investment would be worth almost £110,000 if the returns are not spent. Some stocks also offer quarterly or yearly dividends, which is a distribution of the company’s earnings to the current owners of their stock. The dividend rate can range significantly, from 0.5% to 11% of the stock’s value. The higher the dividend rate, the higher the risk associated with that stock and company. Companies that are strong and well established have low to medium dividend rates, which can range from 2%- 6%. These payments can be paid directly into your retirement account or personal account.
When you have funds in a stakeholder’s pension, defined contribution scheme or just a personal account, you will typically have to decide on what assets the funds are invested in. There are many types of investments you can make, from stocks, Exchange Traded Funds (ETF’s) and government bonds (Gilts). Choosing what to invest in is your personal choice, which depends on how much risk you like to take on. Government gilts, which is essentially a loan to the government, have the lowest risk, but the lowest returns. Stocks on the other hand, can have exceptional returns, but at higher risks. Lower risks means lower returns and higher risks are compensated with higher returns.
Many pension providers will try to make the investing decisions you take as easy as possible and will offer a wide range of funds, stocks, and plans that you are able to choose from as an investor on their platform. Financial Advisers such as www.evasonfildes.com can also offer clients a default option, which is best suited for that particular person and takes into account a range of information, such as age, income and risk. They offer pension, investment, protection reviews as well as ways to protect yourself and your investments from the multitude of scams.
If you choose to invest in particular companies yourself, it is vital that you do the proper due diligence before investing. Due diligence is the research and steps taken by investors to screen investments and companies before investing, making sure the company has future potential, great history and how the company is run by the directors and executives. The due diligence process separates the good companies and the great companies, especially when investing for your future and your savings.
When you are investing into your own future, diversification is key. Diversification is a technique of investing into different companies that are not related to one another, such Tesco (TSCO.L), Barclays (BCS) and Halma PLC (HLMA). In this example, all three companies are not related to one another and do not compete in the same industry. An example of lack of diversification is investing in the NatWest Group (NWG), Barclays (BCS), and CYBG plc (VMUK), were all of the companies operate in the banking sector. Diversification allows you to spread your risk across multiple investments, which will reduce your losses in in an economic downturn.
Investing in ETF’s is a great way to reduce your risk and increase your diversification, especially when starting to invest in your pension. ETF’s are a type of financial asset that is comprised of other assets, which can be anything, from real estate, stocks, gilts, and commodities. ETF’s are traded the same way as stocks, and there are many to choose from, depending on your investment strategy and risks you would like to take on. Websites such as www.evasonfildes.com have great guides on how to prepare for the future, from aspects such as insurance and protecting you from basic uncertainty, the same way ETF’s and diversification protects you from financial risks.
It is wise to revisit and review your investments once or twice per year as a precaution, allowing you to adjust your investments if you choose, update your information or to invest in new companies that have gained momentum and you see these companies growing significantly in the years to come. As you grow older and are coming closer to retirement, you may want to have less risk than when you were younger. It is advisable you adjust your investments over the years accordingly.
Investing used to be a difficult and complex problem to take on if you are in your early 20’s, but has been simplified significantly in past decades, with companies like www.evasonfildes.com, making the process of investing incredibly simple regardless of your pension plan or financial goals. The best time to start investing would be as soon as possible.
The value of investments can fall as well as rise. You may get back less than you invested.
Getting started on your future financial stability and your pension plan has never been easier than it is now, especially with Evason Fildes guiding you through the process.