This is all about dividing your monies into various sections to cover all your needs, and of course meeting your risk-reward profile.
Most people will end up with something along the following lines:-
- Emergency fund. A deposit account set aside to cover any planned short-term spending need or deal with an emergency (such as becoming unemployed and needing income while seeking another job).
Each person needs a different amount, but we would normally consider less than three months' income would be insufficient for emergencies, although if you have more than a year's money on deposit then this is probably too much.
- Investments to meet known expenditure within 1-5 years. These would range from deposit funds (e.g. for house purchase) to safe investments offering good rates of return over fixed periods (possibly deposits, perhaps National Savings, other fixed or near fixed rate of return investments).
- Medium to long term savings. Given that the money is not expected to be needed for 5 or more years the whole range of equity-based and managed funds can be used in order to seek the maximum long term growth in the major world economies, subject to your attitude to risk.
- Speculation. A speculative investment is one where the potential rewards are very high, but so are the risks. Speculative investments may not be an area that we normally get involved with, except perhaps to alert you to any that you may have. We do find that some people have bought them in error, or inherited them. The commonest speculative investments are direct holdings in small companies, AIM listed shares, and certain unit or investment trust holdings where the trust is in emerging or technology markets.
The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations), and investors might not get back the full amount invested. Past performance is not a guide to future performance. The levels, bases and reliefs from taxation may be subject to change.