Your investment profile

Income or growth?

To work out the most suitable type of returns (the money we earn from investments), we need to decide if income or growth is a bigger priority. We could ask:

• Do I want to use the money my investment earns as income to live off during the duration of the investment?
• Do I want to reinvest it with the original amount, and grow my lump sum as much as possible?

If short-term income from investment is important, it's probably best to put the money where it will earn a guaranteed return. For example, a bank deposit paying a fixed amount of interest for a set period.

If we want to grow a nest egg as much as possible and don't need the income in the short term, we can consider investments that don't guarantee the return from year to year, such as shares.

How easily can I get the money?

Liquidity means how quickly we can convert our investment into cash before the end of the investment period.

A high-liquidity investment means we can get at our investment any time. A bank savings account is an example.

In a low-liquidity investment, it may take time to find a buyer and complete the sales process. Property is usually a low-liquidity investment.

Shares in public companies generally have reasonable liquidity.

Some investments may be ‘illiquid’ – we can’t get our money until a certain date or event (e.g. retirement).

Find out how much risk you're comfortable with

Risk and reward is the classic investor’s balancing act.

The higher the risk we take, the higher returns we could receive, but the more chance we have of our investments losing value, fluctuating in value, or failing entirely.

With a low-risk investment, we generally know the return we will receive right up front. A bank savings account is a low-risk investment. We know the return (the interest rate), but compared to riskier investments, like shares, it isn't very high.

Higher returns are only available with higher risk. The risks come in two types:

• Volatility: The possibility that the value of the investment will go up and down.
• Performance: The possibility that the investment could fail and we lose all or part of our money – or the investment gives us a lower return than expected or needed.

If considering high-risk investments, be sure to balance the risks with other investments in lower risk areas (like short-term deposits, or cash and bonds).

Generally, it’s easy to recognise high-risk investments because the potential returns also stand out as really high. The promise of too-good-to-be-true returns is probably just that: not true.