The idea of getting started investing if you’ve never done it before can seem really daunting.
After all, many of us associate the word “investing” with huge sums of money and risky financial commitments. You might feel that investing is the kind of thing you should only do if you have a lot of financial expertise, or are prepared for potentially hefty losses.
But the truth is that you don’t have to be a financial expert to have a go at investing, and provided you’re prepared to hold your investments for the long term, the hopes is that they might ride out any stock market volatility, although of course there are no guarantees. If you have a pension, you’ll already be an investor anyway, which might make holding other investments feel a little less intimidating.
In this article, we’ll outline the basics of investing and how you might approach it – then we’ll explain how some of the most common forms of investment work to help you decide whether any of them could be right for you.
Contents
- Can I invest if I don’t like taking risks?
- Is it too late for me to invest?
- What does diversification mean?
- What is the difference between saving and investing?
- Managing your pension investments
- Investing in bonds
- Investing in shares
- Investment funds
- Ready-made investment portfolios and robo-advice
- High-risk investments
- The importance of individual Savings Accounts (ISAs)
- Is investing right for me?
Can I invest if I don’t like taking risks?
One thing that puts many people off investing is the idea that it always involves taking risks with your money.
However, investing comes in many forms, with many different levels of risk, and some investments are certainly much lower risk than others. You must, however, be comfortable accepting some risk. If you aren’t, then investing isn’t likely to be right for you.
As previously mentioned though, if you have a pension, then you are technically investing already. The money in your pension pot isn’t just sitting there – it’s being invested on your behalf by your pension’s fund manager. We don’t commonly think of simply having a pension as a highly risky investment, even though there is a chance that your pot could end up being worth less than the contributions paid in.
The point is that investing doesn’t have to be incredibly high-risk, and you can approach it however you choose. Of course there is always a certain level of risk – no investment is guaranteed to make you money, meaning there is always the possibility of making a loss. But if you can figure out a level of risk that is comfortable for you and are prepared to ride out the ups and downs, it can be really rewarding.
We explore the idea of risk in regards to investing – and how to work out what level of risk you’re comfortable accepting – in our article What’s your attitude to risk?
Is it too late for me to invest?
It’s not uncommon for people in their 50s and beyond to feel as though they might have missed their window for investing. If you consider that your financial future is already pretty secure, you might not see the point, whereas if you feel uncertain about it, you may view it as taking an unnecessary risk.
However, there are usually good reasons to at least consider investing, no matter your circumstances.
For instance, plenty of people are now staying in the workforce longer than they used to previously, for a number of reasons. Many people are finding that they just can’t retire as early as they expected to, even if they have saved into a pension their whole life, since the cost of living (and therefore, the cost of retirement) is going up, and their pension savings may not have kept up in terms of real value. The State Pension age is gradually climbing as well, and is expected to increase to 67 between 2026 and 2028.
It has also never been easier to try your hand at investing – most of the types of investment in this article can be done via online brokerage platforms, meaning the barrier for entry is lower and investing is much more accessible than it used to be. You may also be surprised at how low the minimum investment for certain products can be, often as low as £25 or sometimes even lower. However, make sure you are aware of how your chosen platform charges fees – some will charge you a flat fee to use them, while others may charge a percentage of the amount invested, and there will usually be fees every time you buy or sell an investment.
What does diversification mean?
You might have heard about the concept of “diversifying” your investments – but you may not be totally sure what that means.
Diversification is simply the principle of spreading your investments across a number of different asset classes, sectors, and geographical areas. This might sound stressful or even risky, but the idea is actually that it makes your investing journey less volatile.
Diversification means that, rather than of putting all your eggs in one basket – and risking substantial losses if that particular investment fails – you spread your money across a number of different investments. This means that if one performs particularly poorly or even loses you money, hopefully the performance of some of your other investments can help compensate for this.
Lee Wild, head of equity strategy at investment platform Interactive Investor, says: “An investor who ‘bets the farm’ on one stock, sector, index, or investing style for a long-term portfolio is taking a massive gamble that puts their money at unnecessary risk. No single asset has ever gone up in a straight line forever.”
The importance of diversification is another great reason to familiarise yourself with the different types of investment and asset classes, so you can build a well-balanced portfolio.
What is the difference between saving and investing?
We’ve discussed how pensions are technically a form of investment – does that mean that savings accounts count as investments too?
The short answer is no, savings accounts are different to investments.
Any kind of investment means that there is a risk – no matter how small – of making a loss, as well as the chance of making a gain. This doesn’t apply to most savings accounts, where the idea is that you can get your capital back, along with any interest earned. However, that is not to say that savings accounts are without any drawbacks, as the purchasing power of your savings can be eroded over time by inflation.
For example, let’s imagine inflation averages 3% over the next ten years. That means something that costs you £1,000 today would cost you around £1,383 in ten years time.
But if you put £1,000 in a savings account offering a 1% interest rate, you’ll only earn £100 interest over the same period. So even though you’ve technically made money, its purchasing power will be much lower in a decade’s time. You will have effectively lost £283, not in the sense of literally losing it from your account, but from its value going down compared to everything else.
Typically, the only way that you could lose money from a savings account is if your bank collapses – in this case, you would be automatically compensated up to £85,000 under the Financial Services Compensation Scheme, but you wouldn’t be guaranteed to get back anything above this. You can learn more about how the Financial Services Compensation Scheme in our guide Are my savings safe?
Managing your pension investments
Most pension savers have their contributions automatically invested into a one-size-fits all ‘default fund’.
The default fund is typically what’s known as a ‘lifestyle fund’ which will invest in a broad mix of investments, but predominantly shares, when you are younger and will gradually move into less risky investments, such as gilts (which are government bonds) and cash, as you approach retirement.
This is a simple kind of pension fund where your money is invested in a variety of ways early in your working life with the aim of growing your pot, then as you get older, the fund moves towards investments which are considered low-risk (such as government bonds and cash investments) to avoid sudden changes to your pension when you are closer to starting to use it.
However, this doesn’t mean this is the approach you have to use. With many people wondering whether their pension will be enough to cover their retirement costs, you may be inclined to select different investments in the hope of generating potentially higher returns.
Pension providers tend to offer a variety of different funds, so if you’re comfortable accepting a higher level of risk, you may decide you’d rather opt for something more adventurous than your default fund. Speak to your pension provider to find out what your options are and whether you can change your pension investments. At the very least, it doesn’t hurt to review your current investments and see what the alternatives are.
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Learn more about reviewing your pension investments and why you might consider making a change in our article Where is my pension invested?
Investing in bonds
Bonds are another form of investment that are considered relatively low-risk, meaning they can be a great way to explore investing and gauge how comfortable you are with it. They can also be a great way of diversifying your portfolio if you are already an active investor. The chances are that bonds already form part of your current pension investments, but you may decide you want to explore investing in bonds yourself directly.
Bonds are effectively a form of IOU, to either a company or the government (government bonds are also known as gilts in the UK). You agree to lend them the money for a set term, and they pay you interest in return, either at regular intervals along the term or when the term ends and the bond “matures”. Interest is usually at a fixed rate, meaning you easily work out how much you stand to make from a given bond.
The main element of risk when it comes to bonds is simply whether the borrower can pay you back. If a company were to fall into financial difficulties or go bankrupt, they might be unable to pay you the interest owed or even the capital you leant originally. This is why bonds purchased from major banks or the government are considered very low risk, as the odds of them collapsing or being unable to repay you are quite small.
The other risk of taking out a bond is that you typically can’t withdraw your money until the term ends, and if you can, it will likely come with a hefty penalty. So, you need to be absolutely certain that you can afford to part with your investment for the term of the bond before you go ahead and invest.
You can learn more about bonds in our article What are bonds and how do they work?
Investing in shares
Buying a share essentially means buying a unit of ownership in a company. If the company does well, then your shares will go up in value, meaning you can resell them for a profit. You may also receive a regular income from shares if a company decides to pay dividends to its shareholders.
Of course, shares can go down in value too, which would result in a loss for you if you decide to sell. While certain industries may be considered more reliable than others, it is never totally guaranteed that a share will do well, as businesses can always be unexpectedly hit by problems such as world events (eg. the coronavirus pandemic), economic changes or damage to their reputation, all of which tend to have an impact on share price.
Remember too, that investing in the shares of just one or two companies is a highly risky strategy, so you may instead choose to invest in a fund which gives you exposure to a much wider range of businesses to help spread risk (see below).
Investment funds
A fund is a type of investment where your money is pooled together with that of lots of other investors. That money is then either invested by a professional fund manager on your behalf, or automatically invested according to a particular stock market index, such as the FTSE 100 (Britain’s 100 biggest companies). These are known as active and passive funds (or tracker funds) respectively.
Investment funds are a great example of the benefits of diversifying – your money will typically be spread your investments over a range of companies, not just one or two, so your investments can cover for each other if one of them underperforms. That said, there are a wide variety of funds to choose from, with various levels of risk.
Again, the best way to get started exploring funds is by starting an account on an investment platform and comparing your options. You can read more about the various types of funds in our article Investing – the basics.
Ready-made investment portfolios and robo-advice
Another option if you’re keen to dip your toe into investing but don’t have much to get started with or simply aren’t too confident is a ready-made investment portfolio. Some companies offer these along with so-called robo-advisors to assist you in picking your investments. You will generally be asked a series of questions to determine your approach to risk, financial objectives and so on, after which you will be directed to a portfolio that might suit you. Such platforms include Nutmeg, Evestor and OpenMoney. Some of these services can only offer guidance, but others are authorised and regulated to provide advice.
High-risk investments
Investing can be a high-risk high-reward type of venture if you want it to be, but you should never go ahead with a high risk investment unless you feel confident that you know what you are doing.
Some kinds of investment that are often considered higher risk include cryptocurrency (such as Bitcoin), Venture Capital Trusts (VCTs), land banking, and certain commodities. These are definitely not for the faint-hearted, so before investing, it is extremely important that you fully understand the product inside and out, including how exactly it aims to make money, what the risks are, and whether the provider is regulated by the Financial Conduct Authority (FCA). You should strongly consider getting financial advice before jumping into a high risk investment, and remember that if anything looks too good to be true, it usually is.
The importance of individual Savings Accounts (ISAs)
One particularly tax-efficient way of investing is to hold your investments in an Individual Savings Account, or ISA. This is essentially a tax-efficient wrapper, with the main advantage being that any returns you make from your ISA investments will be tax-free.
Normally, taxpayers have to pay income tax on any payments received from company dividends, and you may have to pay capital gains tax on the profits from any shares that you sell. However, if you hold these investments through a stocks and shares ISA, you won’t have to pay tax on dividend income or on any profits you make at all.
Bear in mind that you can only deposit up to £20,000 into your ISAs each year – this is known as your annual ISA allowance.
You can read more about ISAs in our articles Should I invest in a cash or a stocks and shares ISA? and Everything you need to know about ISAs.
Is investing right for me?
There’s no one-size-fits-all answer to whether investing is likely to be right for you, or which kind of investments you should try. While it can undoubtedly feel like a big financial commitment getting started, it doesn’t need to be, and you don’t have to have a big lump sum available. In fact, making smaller, regular payments into your investments can have its advantages, which you can find out more about in our guide The benefits of saving regularly into a stocks and shares ISA.
Our article Is investing right for you? digs deeper into the kinds of questions you might want to ask yourself before you get started investing, while our Investment glossary can help you get to grips with a few more key phrases. Beyond that, our savings and investments section contains lots more useful articles on a variety of investing topics.
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