People can understand they should invest but may be holding back for a number of reasons. Perhaps the most common is they have not done it before and don’t know where to start.
There is no need to panic, investing can actually be easier than many people think, with more and more products coming to the market that are designed to be simple and accessible.
Savers actually need very little technical knowledge to begin an investment journey. As such, Trustnet spoke to Ben Faulkner from EQ Investors for a guide on how to get started.
Do your homework
As a premise, don’t take advice from an unqualified random person you’ve seen on the internet. You don’t want to lose all your hard-earned money in some scam or an asset class that’s too risky for you. Listen to reputable media outlets and certified, independent advisers.
As legendary investor Warren Buffett famously put it: “Rule 1: Never lose money. Rule 2: Never forget rule No 1.”
Faulkner added: “There's so many people out there who seem to be wanting to take advantage of you, so one of the most important lessons to learn is try to use your common sense. If anything sounds too good to be true, it probably is.
“We've all read about numerous schemes offering great returns and, guess what, they fail to deliver. So do your homework and double check whether a firm is registered and legitimate. Take your time and don’t be rushed into buying anything.”
There’s no ‘get-rich-quickly’ formula, that’s not what investing is for.
Have some emergency money and no debt
Before you start investing, the classic advice is to have no debts and an emergency sum that you can easily access if needed.
Once you’ve paid your credit card debt and others, Faulkner recommended having at least three to six months’ worth of money. If your revenue stream went dry today, how much would you need to get by for the next three to six months? Have that amount saved up in an easy-access savings account – find out here which offer the best rates on the market today and check regularly that you are getting a good deal.
Invest for the middle to long term
People invest for multiple reasons, including income, retirement, their children’s education and more. All of these are long-term goals.
If you are saving to buy a house and you’ll need your deposit in the next one to five years, it wouldn’t be wise to invest it, said Faulkner, because that’s too short a timeframe for your money to grow and it could be worth less than what you originally put in when you need to access it.
So his advice is to have your money in different pots.
“Keep things separate. Building up one pot for emergency savings, one that could be your savings for this deposit or something else. And then your third pot could be your investments,” he said.
Choose the best tax wrapper for you
Then, it’s about finding the right form for your investments. You can invest through multiple vehicles, each with different taxes attached to it. If you’re an employee, you’ve probably been auto-enrolled into a workplace pension scheme; these are very tax efficient, but can only be accessed after a certain age (usually between 55 and 65).
“The huge benefit of a workplace pension is that you get employer contributions of usually 6% to 8%, with some companies also allowing you to match contributions, gaining you further tax relief,” explained Faulkner.
Additionally, or alternatively if you are a freelancer, you might want to consider a Lifetime Individual Savings Account (LISA), a tax wrapper with government contributions where you invest towards your first house or for your retirement. You can open a LISA between the ages of 18 and 39 and your money can only be accessed for a house or after your 60th birthday.
For any other goal and if you want to invest more freely, Stocks and Shares ISAs allow you to invest up to £20,000 tax free per financial year.
Open an ISA
To open a Stocks and Shares ISA, you need to decide which platform you’ll be using to buy your investments from.
There are many providers on the market with different charges and slightly different offerings, so you might want to compare and shop around according to your needs. For a good starting point check out this Trustnet guide.
Once your account is open, it’s time to choose what to buy and how.
Understand the basics
This is when you need some basic knowledge of the types of product available. You can choose to buy a mutual fund (what is a fund?), an investment trust (all you need to know if buying an investment trust for the first time) or an exchange-traded fund (ETF). All these vehicles work in a slightly different way but ultimately do the same thing – try to grow your money or, in investment parlance, make a return.
They can contain different asset classes (stocks, bonds and other forms of investments called alternatives) and can be managed by a person (the fund manager) or automatically, following certain rules. This is the difference between active and passive investing.
If it’s all getting too complicated, there’s an easy way out. Over time and if you’re interested, you can get informed to the point that you can make your own decisions for which funds to buy and how you want to build your investment portfolio, but the good news is that you don’t have to right now (or ever). If you don’t care or don’t have time for the technicalities, you can simply put your money into a mixed-asset fund.
Consider a mixed-asset or a multi-manager fund
Mixed-asset (or multi-asset) funds contain a mix of different asset classes, trying to give you exposure to multiple sources of return. There are even funds that contain other funds in the attempt to give you ownership of the best investment strategies on the market.
These are called funds of funds or multi-manager funds. They are usually more expensive but if you invest in this way, all the research is already done for you.
“Ready-made portfolios are certainly one route to go down, because often they're made up of approximately 15 to 20 funds and achieve good levels of diversification, giving investors exposure to different geographies, assets and investment styles,” said Faulkner.
Here you can check out which mixed-asset funds have consistently delivered the best returns in the market.
Click ‘buy’
Once you’ve found a fund you like, it’s time to part from your money for now and let it do its work. But all of it now? Why not little by little (a strategy called drip feeding)?
Both are possible, it just depends what you’re more comfortable with. Faulkner recommends to start adding your money on a monthly basis.
Markets go up and down in value every day and so will your money while it remains invested. It’s called ‘volatility’ and it can be scary, so dripping your money into the market is a good way to get used to seeing your money fluctuate, said Faulkner.
Here is a more in-depth guide on how the benefit of drip feeding versus going all in.