Shares will be running series of Christmas features explaining the top 10 golden rules of investment.
Rule number 1: Set yourself a clear goal
Before deploying a single pound of your hard-earned savings you need to ask yourself five key questions:
• Why am I investing?
• What is my time horizon?
• How much can I afford to invest every month?
• What is my annual return target?
• What is my appetite for risk?
By answering the first three questions you should be able to arrive at your required annual return target. You may wish to generate a 4% to 5% annual return. In this case a portfolio of Gilts, good quality corporate bonds, a little high yield debt and some defensive equities could do the trick, if history is a fair guide. The table below shows you how to measure risk with the potential rewards on offer from a range of asset classes. The lowest risk option, which therefore has the most modest reward potential, is UK government debt, since the UK Government has not welshed on its debts since 1672 and King Charles II’s Stop of Exchequer. Even then bonds can go down as well as up and you can suffer capital losses if you do not hold a bond from issue to maturity.
Most savers will want to rack up long-term gains that are a good margin in excess of inflation in the pursuit of a decent pension pot for retirement. Equities have historically proven to be the best way of achieving this goal. They have generated an average annual return of 10.6% over the past 30 years, versus an average inflation rate over this period of 3.7%, made up of a 7% compound annual average growth rate in the FTSE All-Share and an average 3.6% dividend yield. You may need to take on more risk to bag this additional return but a suitably long time horizon means you should be able to stomach the market’s periodic swoons.