Investing your hard-earned cash can be a daunting prospect. It’s hard to know where to start, and it’s tempting to dodge the issue altogether. When people ask for my advice as an investor as to what they should do with their personal finances, I always say one thing: act, and act now.

Leaving your money in the bank means it’s actually losing value. Even if it’s attracting a modest rate of interest, that will be outweighed by inflation and tax, which means your spending power is diminishing. Experienced investors will tell you there’s only one way to beat inflation, and that’s by investing wisely and consistently.

Work out how much disposable income you have to invest every month, draw up a plan, and stick to it. It’s all about putting your eggs into a range of different baskets, so you can minimise risk and maximise reward. Opt for what’s known as a “target-date fund”, and you can set up a monthly payment and leave everything on autopilot.

Target date funds, designed for medium-term growth, initially focus on riskier growth stocks for the greatest reward, then gradually switch to more conservative investments as the target date approaches.

Typically Five Years

A typical target date fund will have a five-year lifetime, but they’re also available for longer-term investors who may have future expenditures in mind. Creating a financial plan for the next five years will help you think clearly about your financial goals and how to achieve them. Effective investing is a marathon, not a sprint. The aim is to create a five-year investment plan for steady growth, rather than a rollercoaster of gains and losses.

Remember, investing your money is a smart way to increase your wealth over time. Everybody’s different and there’s no such thing as a “one size fits all” product when it comes to investing. But here are some important factors to consider:

1. How much can you invest on a regular basis? Subtract your monthly outgoings from your revenue and decide how much of that disposable income you want to invest.
2. Set your goals. Are you putting some cash aside for a rainy day, or are you trying to build wealth?
3. What level of risk do you regard as acceptable? The greater the risk, the greater the potential reward. But there’s also an increased chance of a loss. Stocks are usually viewed as riskier than bonds. Generally speaking, the longer your “time horizon”, the more likely you are to accept risk.
4. Where do you want to invest? Stocks and bonds are popular, as are exchange-traded funds (ETFs) – collections of stocks or bonds in a single fund that’s traded on stock exchanges. For a moderate-risk investor a typical split would be 20% bonds, 70% stocks and 10% cash allocation. A lower-risk investor, mindful of price stability, would switch from bonds to stocks (40% bonds, 50% stocks and 10% cash) and someone approaching retirement should consider further shifting the emphasis, to 60% bonds, 30% stocks and 10% cash).
5. Like a coach checking his team, you’ll need to re-assess from time to time. If stocks wildly outperform bonds, or vice versa, you may decide to change your allocations.

Smart Way to Beat Inflation

There’s no question that investing your money is a smart way to beat inflation and increase your wealth over time. Here are a couple of suggestions if you’re looking for a five-year investment plan. Equity mutual funds invest almost all their clients’ money in a range of stocks or equities of publicly traded companies.

You spread the risk while professional fund managers take care of the investment decisions.

There’s a variety of funds to suit different investment goals and risk tolerances. It’s also worth considering Fixed Deposits. I know I cautioned against leaving your money in the bank earlier, but Fixed Deposits – with a bank or other financial institution – offer a guaranteed interest rate on a lump sum for a specified term. Returns will probably be lower than equity mutual funds, but Fixed Deposits provide a level of certainty that the funds don’t.

Weather the Bumps

If you’re wondering why so many financial products have a five-year life, it’s because that’s really the time you need to weather any bumps in the road and to be reasonably certain of a good return. Shorter term plans – typically from three months to a year – reflect too much of the markets’ activity during their lifetime, which can be very good. Or not.

A five-year investment plan allows you to build on your successes, with your money invested across a diversified pool of asset classes. You benefit from compound returns, or the ability to re-invest this year’s gains and reap even bigger rewards next year. On the flip side, it’s also short enough that you don’t feel your money is tied up forever, and some plans even allow you to withdraw your money, albeit with penalties, in case of emergency.

There will always be an element of risk in any investment. But you will always be better off investing – taking part in the game – than sitting on the side-lines and doing nothing. Even a low-risk player will reap greater rewards than a non-player.

My advice: Start investing now and enjoy the benefits in 2029.