Starter guide to investing
If saving is about putting your money away, then investment is about putting it to work. When you invest, you try to make your money grow more actively than it would in a savings account, in the hope of beating inflation and ideally generating some additional returns. However, you also expose your money to more risk.
Assuming you have a pension, then you are already an investor – because your pension pot will be invested in a fund made up of different assets. You may even take an active role in managing this fund, by holding a self-invested personal pension (SIPP). But you can also hold non-pension investments to help your money grow, perhaps with a particular goal or timeframe in mind.
Whether you want to be an active investor or just develop a better understanding of your pension, this quick guide to investing is for you.
Think about your goals
Before you invest, ask: what am I investing for? A new house, a wedding, children’s education, your next car, a dream holiday, or just for a rainy day? Is this goal in the near future, or a long way ahead? Timeframe is a major factor in choosing the right investments. A financial adviser can help you identify specific goals and assess their timeframes, as a first step towards building an investment strategy.
Consider your risk tolerance
Ask yourself how much risk you can afford to take. Risk is fundamental to investing; generally, higher growth investments carry higher risks, while low-risk investments tend to offer low growth. So what is your ‘risk tolerance?’
This isn’t about how cautious you are in general. Rather, it’s about how resilient your finances are, and how much you could (theoretically) afford to lose without it affecting your lifestyle. It will also depend on factors like job security (how safe is your job?) and other commitments (are you likely to need spare cash at short notice?). Timeframe may also be involved. Sometimes you may find that your true risk tolerance is much higher, or lower, than you thought. A financial adviser can assess your ideal risk level as part of their initial fact-find.
Create an investment strategy
Your strategy is where you pull together your goals, timeframe and risk tolerance and decide how to invest your money to meet all these criteria. For example, if you have just had a baby and want to invest for their college education, that is a long-term timeframe, so your risk tolerance may be greater than normal. You might therefore look at saving smaller amounts into higher-risk investments. Conversely, if your daughter is at college and you want to save up a wedding fund, that could be medium or even short term – involving larger sums into lower-risk assets.
Choose your assets
Whatever your goals, your adviser will generally recommend a diverse portfolio made up of different investment classes, following the rule about not putting all your eggs in one basket. Your strategy will determined how these are mixed, so that the overall portfolio fits your risk profile and goal.
If you want to be actively involved in choosing assets, always discuss your preferences with your adviser. Even if you are an experienced investor, a second opinion is always valuable.
Remember that growth on investments is taxable, but you can place a limited amount of investments in a stocks & shares ISA to minimise the tax.
Manage your fund
Having set up your portfolio according to your investment strategy, remember that it will change naturally over time as the various assets grow at different rates. For instance, if the higher-risk assets grow faster for a period, a larger percentage of your money will now be in high-risk assets. After a while this may mean that your portfolio no longer fits your risk profile. Your adviser will be able to monitor your investments and rebalance them, to ensure they remain suitable.
Similarly, as you approach your planned goal, your risk profile may change. This may require you moving out of riskier investments into more stable ones, so that your investments don’t suddenly lose value just before your goal arrives.
Beware investment fees
Whatever kind of investment you hold, you will be charged an annual management fee. In many cases, this fee does not represent the best value out there, so you may be paying twice or even three times as much as you need to. Over the years, this can make a big difference to the performance of your fund.
Management fees are taken directly from your funds without a bill being sent to you, so it may be difficult to keep track of how much you are actually being charged. They may also rise over the years, and the rise can be steeper than you think. For example, a 1 per cent rise sounds small - but if your fund has grown in the meantime, it could mean paying thousands of pounds more over the course of your investment.
Your adviser can check up on the management fees you are paying, both on your investments and your pensions. Ask them to find you investments with similar performance that have lower fees.
Once you've set your goals and timeframe, stick to your plans and don’t try to second guess them. A sudden dip in the market can damage your confidence, while a surge may tempt you to take more risk than you can tolerate. Don’t let your plans be swayed by bad or good weather, unless your adviser agrees that it’s time to change tack. Your destination is what matters.
Of course, equities and bonds aren’t the only kinds of investments out there. If you’d like to consider more tangible assets, then find out about investing in property, some other ways to invest and recent investment trends.
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