Investing – beginner’s guide
If your savings goal is more than five years away, putting some of your cash into investments could allow you to earn more from your money and keep up with rising prices.
What are investments?
Investments are something you buy or put your money into to get a profitable return. Most people choose from four main types of investment, known as ‘asset classes’:
- Cash – the savings you put in a bank or building society account
- Fixed interest securities (also called bonds) – you loan your money to a company or government
- Shares – you buy a stake in a company
- Property – you invest in a physical building, whether commercial or residential
There are other types of investments available too, including:
- Commodities like oil, coffee, corn, rubber or gold
- Foreign currency
- Contracts for difference, where you bet on shares gaining or losing value
- Collectibles like art and antiques
The various assets owned by an investor are called a portfolio. As a general rule, spreading your money between the different types of asset classes helps lower the risk of your overall portfolio underperforming – more on this later.
With an instant access cash account you can withdraw money whenever you like and it’s generally considered a secure investment. The same money put into fixed interest securities, shares or property is likely to go up and down in value but should grow more over the longer term, although each is likely to grow by different amounts.
Returns are the profit you earn from your investments. Depending on where you put your money it could be paid in a number of different ways:
- Interest (from cash deposits and fixed interest securities)
- Dividends (from shares)
- Rent (from properties)
- The difference between the price you pay and the price you sell for – capital gains or losses
How fees reduce investment returns
Managing investments takes time and money and service providers will charge a fee. This cost can eat into the returns you’ll receive and it’s something you should ask about before you invest. Our popular investments guide indicates the sorts of fees to look out for, or you can get an overview for all investments by following the link below.
None of us likes to gamble with our savings but the truth is there’sno such thing as a ‘no-risk’ investment.
You’re always taking on some risk when you invest, but the amount varies between different types of investment.
Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time. This is because the interest rate paid won’t always keep up with rising prices (inflation).
On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls you could earn less in interest than you expected.
Stock market investments may beat inflation and interest rates over time, but you run the risk that prices may be low at the time you need to sell This could result in a poor return or, if prices are lower than when you bought, losing money.
When you start investing, it’s usually a good idea to spread your risk by putting your money into a number of different products and asset classes. That way, if one investment doesn’t work out as you hope, you’ve still got your others to fall back on. This is called ‘diversifying’. Find out more in our guide below.
When should you start investing?
If you’ve got plenty of money in your cash savings account – enough to cover you for at least six months – and you want to see your money grow over the long term, then you should consider investing some of it.
The right savings or investments for you will depend on how happy you are taking risks and on your current finances and future goals. Follow the links below to get the answers.
Top tips for choosing investments
Use these tips and key steps to help find an investment that’s right for you.
- 1. Review your needs and goals
- 2. Consider how long you can invest
- 3. Make an investment plan
- 4. Diversify!
- 5. Decide how hands-on to be
- 6. Check the charges
- 7. Investments to avoid
- 8. Review periodically – but don’t ‘stock-watch’
- Key investing steps
1. Review your needs and goals
It’s well worth taking the time to think about what you really want from your investments. Knowing yourself, your needs and goals andyour appetite for risk is a good start, so start by filling in a money fact find.
2. Consider how long you can invest
Think about how soon you need to get your money back. Time frames vary for different goals and will affect the type of risks you can take on. For example:
- If you’re saving for a house deposit and hoping to buy in a couple of years, investments such as shares or funds will not be suitable because their value goes up or down. Stick to cash savings accounts like Cash ISAs.
- If you’re saving for your pension in 25 years’ time, you can ignore short-term falls in the value of your investments and focus on the long term. Over the long term, investments other than cash savings accounts tend to give you a better chance of beating inflation and reaching your pension goal.
3. Make an investment plan
Once you’re clear on your needs and goals – and have assessed how much risk you can take – draw up an investment plan. This will help you identify the types of product that could be suitable for you.
A good rule of thumb is to start with low risk investments such as Cash ISAs. Then, add medium-risk investments like unit trusts if you’re happy to accept higher volatility. Only consider higher risk investments once you’ve built up low and medium-risk investments. Even then, only do so if you are willing to accept the risk of losing the money you put into them.
It’s a basic rule of investing that to improve your chance of a better return you have to accept more risk. But you can manage and improve the balance between risk and return by spreading your money across different investment types and sectors whose prices don’t necessarily move in the same direction – this is calleddiversifying. It can help you smooth out the returns while still achieving growth, and reduce the overall risk in your portfolio.
5. Decide how hands-on to be
If you need help understanding a financial product, get financial advice before you buy.
Investing can take up as much or as little of your time as you’d like:
- If you want to be hands-on and enjoy making investment decisions, you might want to consider buying individual shares – but make sure you understand the risks.
- If you don’t have the time or inclination to be hands-on – or if you only have a small amount of money to invest – then a popular choice is investment funds, such as unit trusts and Open Ended Investment Companies (OEICs). With these, your money is pooled with that of lots of other investors and used to buy a wide spread of investments.
- If you’re unsure about the types of investment you need, or which investment funds to choose, get financial advice.
6. Check the charges
If you buy investments, like individual shares, direct, you will need to use a stockbroking service and pay dealing charges. If you decide on investment funds, there are charges, for example to pay the fund manager. And, if you get financial advice, you will pay the adviser for this.
Whether you’re looking at stockbrokers, investment funds or advisers, the charges vary from one firm to another. Ask any firm to explain all their charges so you know what you will pay, before committing your money. While higher charges can sometimes mean better quality, always ask yourself if what you’re being charged is reasonable and if you can get similar quality and pay less elsewhere.
7. Investments to avoid
Avoid high-risk products unless you fully understand their specific risks and are happy to take them on. Only consider higher risk products once you’ve built up money in low and medium-risk investments.
And some investments are usually best avoided altogether.
8. Review periodically – but don’t ‘stock-watch’
Research shows that investors who watch their investments day to day tend to buy and sell too often and get poorer returns than investors who leave their money to grow for the long term.
Regular reviews – say, once a year – will ensure that you keep track of how your investments are performing and adjust your savings as necessary to reach your goal. You will get regular statements to help you do this. Find out more below.
However, don’t be tempted to act every time prices move in an unexpected direction. Markets rise and fall all the time and, if you are a long-term investor, you can just ride out these fluctuations.
Key investing steps
- Complete a money fact find
- Making an investment plan
- Do you need a financial adviser?
- Popular investments at a glance
- How to buy investments
- Review your savings and investments
Hope my blog readers enjoyed todays blog and remember money makes money so go out there and take some calculated risks!