How to start investing safely and profitably
Have the spare cash
Inflation is running at 3.1%, and finding a savings account paying above that is impossible. But many experts claim you can reasonably expect investments to grow by about 4% a year after fees are taken into account, or more if the stock market has a strong run.
If you invested £50 a month for 10 years and enjoyed a 3.9% return, you would end up with £7,348, according to investment firm Fidelity. That’s growth of £1,348 on your contributions. Carry on for 20 years and your profit rises to £6,193.
If you are in it for the very long term, and are lucky, your returns may be supercharged thanks to the power of compounding. Like a snowball rolling down a hill, your investment earns returns, and those gains are reinvested and start earning returns, too.
However, remember investing means taking some risk – it’s possible investments could fall in value, so this isn’t for everyone. First, you need some cash set aside for emergencies, so allocate some of your savings to that. It’s also vital to tackle any expensive debt, such as credit or store cards, before diving into the stock market.
Assess your risk
Before choosing where to put your money, decide on your risk profile. In other words: how comfortable are you with seeing the value of your investments fall?
As a rule, the sooner you need your money, the less risk you should take. Online investment providers designed for self-starters, such as Nutmeg, Evestor, Wealthify, and sustainable investment provider Clim8, simplify this. Pick from a few investment options, rather than thousands of funds, after the providers have asked basic questions about your preferences and goals to match you to suitable options.
Investing a small amount every month is a great way to get started. You could, say, kick off with £25 a month into a single fund, although some providers will accept contributions from as little as £1.
Regular investing will help to iron out the highs and lows of the market. You buy more shares when the stock market is performing poorly and the price is lower, and fewer when their value rises.
You can invest a lump sum, too, if you have some cash savings you want to put to work in the stock market, for example, but this is a higher risk strategy as you might be buying at the top of the market.
Rather than buying shares in individual companies, funds are a good option for beginners. They hold a range of different companies, so you don’t have all your eggs in one basket.
“When it comes to choosing funds, I think of personal investors in three broad camps: ‘choose for me’, ‘help me choose’ and ‘I’ll choose myself’,” says Tom Stevenson, investment director at Fidelity International.
Many investment websites offer best-buy fund lists put together by experts, including Hargreaves Lansdown’s Wealth Shortlist, and Interactive Investor’s Super 60.
There are two main fund types: index trackers and active funds. Trackers, also known as passive funds, follow a particular market index such as the FTSE 100. They typically return the average of the market they invest in, and, as there is no one choosing the investments, they are the cheaper option.
Active funds are usually more expensive as they have a manager who chooses the shares they hold, aiming to beat the market.
You can pick from thousands of funds, such as those focusing on, for example, sustainable investments, smaller companies or emerging markets.
Holding a range of funds spreads your money and protects you from market falls. If one company falls in value, hopefully another will rise.
If you don’t know where to start, you could go for a single, ready-made fund that holds investments from around the world.
Interactive Investor has a list of six quick-start funds. “These are well-diversified, multi-asset portfolios that are very competitively priced,” says Moira O’Neill, its head of personal finance. They include Vanguard’s LifeStrategy funds, each investing in thousands of global companies.
Alternatively, there are model portfolios on investment websites. These include a mix of some of the most popular funds and can be used as a template to build your own portfolio. AJ Bell Youinvest offers four ready-made options, tailored to whether you are cautious, balanced, adventurous or seeking income.
Watch out for fees, as these can really eat into your returns. Investment providers either charge a percentage fee, based on how much you invest, or a fixed fee.
Comparetheplatform.com offers a simple calculator to help you find the most appropriate and cheapest provider. “A percentage charge is better for portfolios up to £50,000, and Vanguard is the cheapest but has a limited selection of investments,” says Bella Caridade-Ferreira, the chief executive of Comparetheplatform.
If you are investing a larger lump sum, you will be better off with Interactive Investor, which charges £9.99 a month, including one free trade a month, she adds. As your investment grows, charges stay the same with a flat fee.
You’ll pay for your investments on top of this fee, and to buy and sell funds. Average charges on active funds are about 0.75%, which, on top of a 0.25% service fee, brings the total to 1% a year.
Use your Isa allowance
Wrapping your investments in a stocks and shares Isa means you won’t pay tax on profits, or need to include them on your tax return.
This tax year you can invest up to £20,000 in an Isa wrapper. You can invest all, or some, of your allowance in a stocks and shares Isa, and hold any investments you wish.
Investing can be a bumpy ride, but it generally pays to hold your nerve. You need a time frame of at least five years, ideally far longer.
If you can sit tight through market falls your investments may bounce back and go on to be worth more.
“Great years can often follow terrible ones,” says Richard Hunter, head of markets at Interactive Investor. “In 1974 the UK was beset by recession, a miners’ strike, three-day weeks and an oil crisis – the FTSE All Share tanked 55%. The following year it rose by 140%.”
If you want further help before investing, seek assistance from a financial adviser, but you will need to pay. You can find one local to you online on Unbiased or VouchedFor.