What Constitutes An Ideal Investment

By Margaret Ntifo

Despite popular belief, investing in the Stockmarket does not have to involve high risk, extortionate commissions and fees, punitive restrictions, specialised knowledge or even much effort on your part. There are many different ways to invest your hard earned money to create wealth. Some routes involve higher risk than others.

Depending on your objectives, your aim should be to choose the lowest risk route for your investments.

The ideal conditions to make your investments worthwhile would depend on your individual circumstances but there are general conditions that most people expect. Usually these are:

1. High return
2. Minimal Risk
3. Low Maintenance
4. Low Fees and Commissions
5. Easy Access
6. Maximum Flexibility
7. Tax Efficiency

High Return

Although no one can guarantee you a high return on your investment, when you invest over the long term and are not pressured to withdraw your money in the short-term, you are virtually protected from market corrections. Sudden downturns in the market are factors that affect the short-term investor.

The ability to generate a significantly high return on your investment comes with the willingness to accept a relatively low investment risk. A good investment should produce returns between ten to fifteen per cent over a number of years with a minimal risk to your money.

A reasonable target return to aim for is twelve percent, which can mean that your investment can fluctuate annually. But over a number of years you can anticipate an average return over a number of years of twelve percent. When the return on your investment dips at any time to seven percent at any time that should not cause any concern providing the average return for the entire period is high.

Minimal Risk

It is equally important to limit the investment risk to your money. The subject of risk is relative to every person, and greatly depends on your financial circumstances and your understanding of the Stockmarket. Your aim for any investment should be to achieve a high growth with minimal investment risk to money. Ideally, you should be investing your money for the medium to long term. Short-term investing is inherently risky as it exposes you to fluctuations in the Stockmarket.

Even experienced investors and professionals lose money speculating on the stock market. Some people spend their entire professional lives studying stocks and shares and still only get it right half of the time.

For a person fairly inexperienced with the Stockmarket, investing directly into the market bears a higher risk and can be potentially costly, with less predictable outcomes. That is why investment advertising always includes the warning: "The value of your investment can go down as well as up", and "Past performance is not necessarily a guide to the future".

The good news is that you do not have to be a specialist in the market to benefit from high growth with minimal risk.

Low Maintenance

Investing through a stockbroker is one of the most expensive routes into the Stockmarket, especially if you are just starting. This is usually high maintenance investing, as you need to give instructions to the stockbroker when shares are being bought or sold, and monitor the Stockmarket regularly. Also, your investment should achieve a significantly higher return to justify the additional funds to pay the stockbrokers fees.

Ideally, most people prefer investments that are easy to set up and simple to maintain with little investment knowledge. It should take some effort to initially set up and manage, but once set up you want to be able to focus on other important aspects of your life, including generating more wealth in other areas.

It is best to look for the safer routes into the Stockmarket depending on your financial circumstances. Once you have more spare capital you can choose to play the market then.

Fees and Commissions

You want to pay as low fees as possible. You cannot avoid paying charges altogether if you are investing in the Stockmarket. However, there are acceptable and unacceptable charges.

What you do not want is to pay extortionate fees for a service that you can get elsewhere for far less. Also, a higher charge does not necessarily constitute a better management service. High fees and unnecessary charges can severely constrain the growth of your investment, which will eventually affect its value.

Pension funds and endowment policies have demonstrated the exemplar damage that high charges can have on your money. The bulk of commissions and charges on pensions and endowment policies are front-loaded, which means the fees are taken out in the first couple of years before the investment has had a chance to grow. These charges adversely affect the growth of the funds.

Some financial advisors argue that their fees may be as little as 3 - 5 % of the overall investment. But what that does is rob your investment of the initial vital growth and reduce the compound growth. Do not underestimate the damage a few per cent charges can do to your money.

Fortunately, there are a number of investments that can be set up without initial payments to third parties masquerading as financial advisors. You will still pay a management fee and you can scout the market for reasonably low fees.

Easy Access

Back in the early nineties, it seemed the fashion for everyone to buy insurance policies, mostly endowments. Why on earth should you continue contributing to a plan that you have no access to when you need it? Insurance policies have maturity dates before which you cannot access your money without incurring punitive penalties.

Pension plans can also only be accessed when you retire, which makes them impractical for other things in case you need access to your money before retirement. The aim of investing your money is to generate wealth for your future, which includes important critical times of life and not just for retirement.

Understandably, the aim of pension plans is to provide funds for retirement, which is justifiable. What you need are additional investments that you can access at any time.

The ability to access your money is crucial, whether you are responding to a crisis or acting on an opportunity. Without easy access to your money, the concept of having wealth sounds meaningless.

On the other hand, though, one has to develop the discipline to avoid raiding your investment until it has had a chance to grow, as this will seriously impede its long-term growth. Self-discipline is important and the onus is upon you to determine what constitutes an emergency that requires the use of your Prosperity Account.

Maximum Flexibility

The best strategy for investing is to invest a percentage of your income on a regular basis, usually monthly. Choosing to invest a minimum of a tenth of your income is a voluntary decision. Hence, it seems meaningless to enter into rigid agreements or contracts that commit you to forced regular savings!

It is important that your investment is responsive to your needs. Your aim is to maintain control of your own money as much as possible and have flexible access to it at all times without penalties. You should be able to transfer your investments if you are not completely satisfied with your initial choice, again without unreasonable charges.

Always retain the control, initiative and decision-making on your own money. It is easy to set up your investments yourself. It is faster and involves less paperwork than delegating it to an advisor who may be limited in the choice of financial products his company offers, or unduly influenced by more profitable commissions relating to particular investments, which may not necessarily be in your favour.

The last thing you want is to hand your valuably earned money to someone else and the control that goes with it. Investing can be simple, and you will learn a lot as you go on. Find your self a mentor or a wealth coach who knows about investing in the Stockmarket, read a lot and take control of your money. It is easier, it is faster and you will be guaranteed to choose your ideal investment.

Tax Efficiency

You cannot avoid paying tax on the returns of your investment, but you can minimise the effects of tax on your investments. Usually, the money you save and invest has already been taxed at source, which means you have already paid tax on it as part of your salary.

Once your savings are invested, you will pay little or no tax for many years. This is great and will allow your investment to grow without undue drawbacks. When you finally come to draw funds out of your investment, you could be liable to capital gains tax and/or income tax.

In the beginning, you do not need to concern yourself overly about tax implications until your fund has reached a significant amount. There are legal strategies to minimise tax effects on your investments. When necessary, find a good tax advisor before withdrawing your investments. You can also read about it yourself.

If you live in the UK, depending on how much you have available to invest within one tax year, you can invest the first (currently) £7,000 into an ISA (Individual Savings Account) to take full advantage of the tax benefits. Beware, though, of any tax-deductible schemes with associated high charges. These charges, effectively wipe out the tax benefits of the scheme. Find a favourable tax environment for your money that has no additional charges.

Follow these guidelines and you are in for a winner!

Copyright 2006 Margaret Ntifo

You may distribute this article in its entirety providing this copyright notice and full information about contacting the author are attached.

Author: Margaret Ntifo is a Wealth & Prosperity Coach, a Women's Wealth Coach specialising in helping women design and create compelling lives and businesses to love.

Further information visit: http://www.MargaretNtifo.com/

Comments

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[Betty]

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

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[Margaret Ntifo]

Thank you, Betty.

[Alisa]

I like the principle of having a margin of safety when it comes to investing and I think that this is critical to making ideal investment choices when it comes to purchasing shares of stock.