Six steps to start off investing
Step one - decide how much you can invest
If you don’t have a lump sum – say from an inheritance - then you need to work out how much you can afford to invest. You must look carefully at your overall financial picture.
You might have debts that should be paid down first. You might be better off paying more into your company pension, which is a way of investing in itself. You should also have a cash buffer in an accessible savings account – most financial advisers reckon a minimum of three months’ salary.
Taking all this into account, if you decide that you have leftover cash each month that you can lock away for the long term – great, go to step 2.
If you don’t have a lump sum – say from an inheritance - then you need to work out how much you can afford to invest. You must look carefully at your overall financial picture. You might have debts that should be paid down first. You might be better off paying more into your company pension, which is a way of investing in itself.
You should also have a cash buffer in an accessible savings account – most financial advisers reckon a minimum of three months’ salary. Taking all this into account, if you decide that you have leftover cash each month that you can lock away for the long term – great, go to step 2.
Step two – decide how much risk you want to take and how long you want to be invested for
The two things are inextricably linked – because the longer you can lock away your funds, the more risk you can sensibly take in the search for higher returns. If you do not have to get at your money for 20 years, then shares become more attractive.
But if you might need it in five years, then a larger chunk of your portfolio might be devoted to other assets like government bonds and property which on the whole are deemed more stable that company shares, however the volatility of the asset varies depending on the kind of property and government bonds to invest in/purchase.
With all investment the value and the income from them may go down as well as up, and as an investor you may not get back the amounts originally invested. There are online tools that can help you assess your attitude to risk. And there is also a new and growing breed of investing platforms that offer basic financial advice and tailored portfolios by asking you a series of questions. This is called “robo-advice” and ranges from the very basic to quite sophisticated.
Step three – decide how you are going to invest
As we’ve mentioned, it may be that the best thing for your to do is to up your company pension contributions rather than set up a separate investing account. There are tax advantages to pension saving, and employer contributions could mean that this is the obvious step for you.
But note – your cash is then locked away until you are allowed to access your pension pot at 55 – whereas you can get at a stocks and shares Isa any time. If you are not sure then seek financial advice. But even if this is the step you do take, then you are still investing – and you still have some control over what you invest in.
You can contact your company pension provider and find out what funds your savings are being invested in. You can often switch it around to other funds if you wish and adjust where future contributions go – although you will only have the choice offered by that particular provider’s scheme.
Read our guide to getting under the bonnet of your company pension here. But if you decide to invest outside your pension, then you may wish to consider step four …
Step four – open a stocks and shares Isa
A stocks and shares or investing Isa is just an account that you can hold your investments in that means you do not pay tax on the income or the profits that you earn. The current limit is an annual £20,000 that can be invested tax free. There are many online providers out there that offer these accounts.
They are relatively simple to open with a few details like your NI number and you can then start buying funds or shares instantly by transferring in cash from your bank account. But they all charge fees in one way or another and your choice of who to go with will be determined by how you wish to start investing.
Do you have a lump sum? Or are you putting away a chunk of your salary each month?
Or just filtering away a few quid each month? Do you want to invest in a lot of different funds or just a few? And how frequently do you wish to trade or switch around your money? For instance, some platforms charge a flat fee and some charge for each transaction. Whatever your choice, your next step is the tricky one…
Step five – choose your investments
Much of this will depend on your answers to step two. Funds – or their same-same-but-different cousins investment trusts - offer an easy way to diversify for many beginner investors.
So-called ”active” funds are managed by professional fund managers and with the aim of delivering good returns back to the investors.
You could choose a mixed or balanced fund that offers immediate diversification across equities, government bonds and property. Or you could choose three different funds, each specialising in one asset class.
Some equity funds are quite defensive – holding secure stocks that protect against volatile swings in the market – while some are more adventurous, focusing on high-growth sectors and markets that carry more risk.
Some equity funds focus on income from dividends and some focus on the capital growth of the companies they are invested in. Some funds focus on geographical regions – like risky emerging markets or less risky UK and US equities. Remember as with all investments your originally capital is at risk.
Investing in individual company shares is potentially rewarding but also quite risky. How you make your choice depends on how confident you are doing your own research. There is a lot of information out there online – just choose reputable sources. You might decide that it’s all too much and you have to pay for financial advice. Or you might go the middle way and allow one of the increasingly sophisticated robo-advisers out there to tailor a portfolio to your risk profile and goals. At all points, watch out for the fees charged – whether it’s by the investing platform or by the fund itself.
Step six – monitor your investments
It is generally advised that beginner investors should not trade too often – i.e. decide where you want to be invested and stick to it. But you should always monitor your portfolio as sometimes some tinkering might be necessary. If you are not looking to access your money for a very long time – like 15 to 30 years – then even a stock market crash is not necessarily the end of the world: in fact if you are investing regular amounts each month it will mean that you are picking up shares on the cheap, that in 15 years’ time could be worth a lot more.
Some geo-political and economic shifts, however, might require that you adjust the proportions in your portfolio. Also, as you get older, or closer to the point where you want to access your pot, you should be moving funds out of riskier assets and into more stable ones.