The whole concept of investing can appear complicated and frightening to many, but it is never too late to start. If you have money at your disposal beyond your living expenses, then saving and investing can help you to meet your long-term financial goals. Engaging the services of a good financial advisor is the first and most important move. They will provide you with the advice you need to help you achieve your investment goals.

What is the difference between saving and investing?

Saving typically refers to putting money to one side, usually in a cash deposit account. Here, you will receive a small rate of interest and your money, or ‘capital’, will not be at risk. Over time, however, the purchasing power of money on deposit will be eroded by inflation.

When you invest, you put your money into a range of different assets, from property to shares. This differs from saving due to the uncertainty over the amount of money you will receive when you sell the asset. The value of the asset might rise, but you also risk making a loss if you have to sell the asset for a lower price than you paid.

Why do people choose to invest rather than save?

Investing has the potential to earn higher returns than saving with deposit accounts. However, as much as they have the potential to be much higher, they can also fall lower. Investing for the long-term is the best way to guard against this.

Protection against inflation

While inflation is at an all-time record high, the best interest rate available on bank savings accounts is around the 3% mark. If you invest money in a savings account paying 3%, and the inflation rate is 5%, then you and your money are effectively going backwards. Investments have the potential to make higher returns to help counter the effects of inflation.

Compound interest

Compound growth occurs when any income or interest is reinvested and grows along with the original money or capital invested.

When you are earning compound interest on an investment, it means you not only receive interest on the principal invested but you also receive interest on your interest plus principal. Then as your gains are reinvested, your investment pool ‘snowballs’ or compounds over time.

Below are some considerations you need to take on board before investing.

Emergency savings buffer

The rule-of-thumb is to build an emergency fund to cover three to six months of living expenses. This could cover unexpected costs – such as car repairs – or bridge a gap between jobs. It is recommended this money is held in a deposit savings account so you can withdraw it at short notice without penalties.

High interest debts

If you have personal loans or credit card debt, it makes sense to repay these first if you’re being charged high interest rates. It may also be worth looking at cheaper options, such as a 0% balance transfer credit card or a lower interest personal loan. The rough rule is that if you’re paying more in debt interest than your money is earning, you should use the money to pay down or clear the debt.

Risk assessment

Your financial advisor will firstly ascertain your personal financial situation, your investment objectives, and most importantly your risk profile.

For them to develop a clear understanding of your attitude to and tolerance of market risk, they will usually issue you with a risk questionnaire which is designed to help you consider the various investment risks and understand how they impact on your personal circumstances. Take time to answer these questions carefully as your feedback will greatly assist them to develop the most appropriate investment strategy to meet your retirement objectives.

Risk tolerance

After you have been assessed, you will be then advised on your “Risk Tolerance”. This is the amount of risk that you will be comfortable taking on or the degree of variability in investment returns that you will be willing to withstand. Proper assessment and advice in this regard is the most important component when it comes to investing.

Asset classes

An investment portfolio is normally divided into basic asset classes such as equities (stocks), bonds, cash, property and alternatives. ‘Equities’ are pieces of individual companies. ‘Bonds’ refer to loans that are issued to companies or the government. ‘Cash’ is literally money in a bank account. ‘Property’ consists of physical property, usually commercial. ‘Alternatives’ include commodities such as precious metals, investments in agriculture and water infrastructure etc. Each asset class works in a different way and has its own rewards and risks. It is important to understand how they work before you make any investment decisions.

Active vs passive funds

‘Active’ funds are actively managed by a fund manager, who buys and sells investments on behalf of the fund to maximise gains and minimise losses. This type of investment style can strategically react to market situations and take advantage of market opportunities as they happen. ‘Passive’ style investing tracks an underlying index and will seek to mirror its performance rather than beat it. An actively managed fund offers potential for higher returns.

Investors with a longer time horizon to retirement tend to initially invest in a portfolio with a heavier weight in equities. Then as you get older, this ratio would change towards lower risk assets to protect your capital.

The ups and downs of investing can be unnerving, but with proper advice, you should have an investment strategy which will match your personal long-term goals and timelines. Risk can never be eliminated when it comes to investing but it can be greatly mitigated and managed with sound financial advice, careful risk measurement and regular reviews, in line with your changing circumstances.

Carol Brick grew up on a farm in Kilmoyley, Co Kerry and is managing director of CWM Wealth Management Ltd. She has a particular interest in financial planning for Irish women and launched HerMoney, a specialist service, in 2017 with an all-female team of advisors. Carol advocates for urgent legislative change around the qualifying criteria for a State pension. Email

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