If you’re new to investing, it can feel scary, and while interest rates on cash accounts have risen over recent months, investing can be a good way to grow your money over the long term.
As a general rule of thumb, you’ll need a timeframe of five years or longer to make investing in the stock market worthwhile, and you must be comfortable with the risks involved. Investments can fall as well as rise in value, and there’s a chance you could get back less than you put in.
If you’re a novice investor, here are some considerations to bear in mind before getting started.
Questions to ask yourself if you‘re thinking about investing
If you have built up some spare cash, and you’re thinking about what to do with your money, investing can be an attractive option. History shows that given enough time and patience, you could make a substantial profit compared to staying in cash.
Investments have the potential for greater returns on your money than a general savings account, and particularly with rates as low as they are currently. However, of course, there is some risk involved.
It’s important to consider if investing is right for you and your personal situation, and asking yourself the following questions may help:
Do you have any debts?
If you have any debts, focus on paying these off before investing. This is because the interest rates you’re charged on most debts are likely to be much higher than returns on an investment.
However, you might have certain debts that you pay little to no interest on, such as a mortgage or money on a 0% balance credit card. In this case, investing may be an option if you’ve already got some cash set aside. Even so, consider whether the money could be better used to drive down the amount left on your mortgage or debt before investing in the stock market.
Remember, it’s usually best to leave your money invested for five years or longer, so you won’t have access to this money during this time.
Do you have an emergency fund?
You never know what life has in store, and it’s important to have some cash saved in an easy access account for emergencies, such as a boiler breakdown. So, before you invest, consider whether doing so would leave you struggling if an unexpected cost cropped up, as it might be a better idea to put the money into a savings account so you have a safety net when you need it.
Do you fully understand the investment?
Any investment has an element of risk, but if you’ve been approached by someone offering an investment opportunity that sounds too good to be true, chances are, it probably is. Although the Financial Conduct Authority (FCA) regulates many investment providers, this isn’t always the case, and there are still fraudsters out there who won’t hesitate to take your money. Helpfully, the FCA has a handy tool to help you identify investment scams.
The key thing to remember if you’ve never invested before, is never to invest in anything you don’t fully understand. If you can’t get to grips with how the business creates the return on your investment, or any part of you feels uncomfortable, then this is a red flag that this might not be the investment for you. Remember you aren’t under any obligation to invest in anything you don’t want to, and walking away is always an option.
How do you feel about risk?
If you’ve answered the above questions and think investing might be right for you, then one of the first things to work out is your approach to risk. A term you will see frequently when it comes to investing is ‘risk appetite’, which broadly describes the level of risk you’re willing to accept. In other words, how comfortable are you dealing with the ups and downs of investing? This depends on:
Your natural approach to risk – You may be naturally quite a cautious person, while others are comfortable with risk and uncertainty. There’s nothing wrong with feeling uncomfortable with higher levels of risk, and remember, you should never invest in anything you don’t feel comfortable with.
Your investing goals and timeframe – If you’ve ambitious goals for growing your investment, and plenty of time to ride the stock market rollercoaster, you might have a higher tolerance for risk in the hopes of generating a greater return. On the other hand, if you’ve a shorter time frame of less than, for example, seven years, you may take a more cautious approach to avoid losing any of your initial investment.
Your personal circumstances and how much you can afford to lose – Whatever investment you opt for, there is a chance you could lose some (hopefully not the majority) of your initial investment, even if you invest over many years. Of course, the hope is that you won’t need the money during a stock market crash, and your investments have time to recover from any downturns, but consider how much you can truly afford to lose.
Understanding the risks of investing
There are plenty of investment options, and some will be considered riskier than others. Many novice investors will choose a fund that includes dozens of companies, and can be a good starting point. This way, your investment is already ‘diversified’, so you spread your risk between different companies. You can find out more about the different types of investments in our article Investing – the basics.
Ultimately, though, it’s about working out what you feel comfortable with. It’s also worth bearing in mind that there are things you can do to mitigate risk, such as making an investment plan which can help you to spread some of your risk.
Whatever investment you choose, there are some general risks involved, too.
Underlying investment performance and volatility
Stock markets can be turbulent, and your investment performance may be driven by a wide range of factors, including the wider economic conditions, company performance, and politics. If you’re investing over a long timeframe, volatility isn’t necessarily anything to worry about, but it’s the main risk to consider if you’re investing for the first time.
By their very nature the value of investments fluctuate over time, and largely this is how you are able to make money, or possibly lose money on them. However, some investments fluctuate more than others and it’s up to you which level of risk you’re comfortable with.
If the rate of inflation goes up, your investment will have to work harder to beat the rising cost of living than perhaps you initially expected. Some investments such as bonds may be index-linked, meaning they rise or fall along with inflation, so they can be a good option for times when inflation is soaring. However, if you’re seeking income from an investment, you want to ensure this has the potential to rise over time, rather than remain fixed.
The Office for National Statistics (ONS) recently announced that the current inflation rate is 4.6% (October 2023), which fell from 6.7% last month. However, with inflation falling, it’s likely that the rates on cash accounts will also start to fall, and investing is potentially a way to beat high prices if you’re comfortable with the risk involved.
Making an investment plan
Deciding where to invest your money should be something you carefully consider and making an investment plan can help to clarify the process and track your investments going forward.
Whether you’ve decided you’re ready to invest, or you are still thinking about it, considering the following steps might help you work out if it’s right for you:
1. Assess your financial situation – Draw up a budget outlining your income and outgoings, to see how much you can realistically afford to invest each month (or if you have a lump sum set aside, do you also have at least three months’ worth of essential expenditure in an emergency savings account). This might mean you factor in an initial timeline for paying off any debts or building an emergency fund before you invest. The last thing you want to do is to put yourself into financial difficulty, so be brutally honest with yourself.
2. Outline your investment goals and timelines – What are you investing towards, how much do you want to invest, and over what timeframe? You may find that you want to have both short-term and long-term investment goals, but mapping out what you want to achieve will help you to choose the right investment.
3. Diversify your investments – One of the secrets to successful investing is investing in a spread of investments. So rather than placing all your eggs in one basket by focusing on a single company, for example, you invest in a variety. It’s simple to do this by choosing a ready-made portfolio of investment or a single multi-asset fund, for example. Read more in our guide Investing jargon explained.
4. Decide what you want to invest in – The opportunities for investments can seem endless, but there are some key types you might want to consider, including shares, funds, trusts, and bonds. It’s worth spending some time learning about each of these and working out which ones appeal to you. You can read more about the different types of investments in our article Investing – the basics.
However, a fund is usually a good option. It can hold dozens of company shares, and may be particularly suitable if you’re just starting out. Funds are a way to spread risk, without relying on the fortunes of a single company. If you buy a managed fund, they also pass on the responsibility of choosing shares to an expert manager.
5. Manage and track your investments – If you’ve found an investment that you’re comfortable putting your money into, then sit back and relax. You may want to check its performance every six months or so, but try not to get bogged down in monitoring day-to-day performance as it can take time to produce gains.
Are you thinking of investing a lump sum?
You don’t need to have a vast amount of money to start investing (you can often invest from just £25 a month), but you may only consider doing so for the first time when you have a lump sum of money.
You probably won’t want this sitting in a current or savings account earning little to no interest over the long term. However, while you take the time to decide what to do with it, you might want to consider putting your money into an easy access savings account. If you have more than £85,000 saved in a single account, it’s a good idea to split your money between a couple of different banks. This means that if the financial organisation you’ve saved your money with were to go bust, the Financial Services Compensation Scheme (FSCS) will protect your money up to the value of £85,000 per person per financial organisation.
You can invest your money in a ready-made portfolio with an investment provider, for example, if you wish. However, if you’re stuck and unsure where to invest, you may want to consider getting financial advice.
If you still aren’t sure, consider getting advice
A simple option is to use an online investment website or app to invest in a range of funds in a single portfolio that’s suitable for you. Known as ‘robo-advisers’, these typically ask you a series of questions to work out which investment option is right for you and they may be suitable if you’re comfortable with this, and can’t afford professional financial advice.
Examples of robo-advisers include Nutmeg, Evestor, PensionBee , OpenMoney or Wealthsimple. Some of these services only offer basic guidance, but others are authorised and regulated to provide financial advice.
The questions you’re asked as part of the online process typically focus on your approach to risk, your financial objectives, and your investment timeframe. Find out more about how these services work in our article What is robo-advice?
If you’d prefer personal, tailored financial advice or you have significant sums to invest, you may benefit from speaking to a qualified financial advisor directly. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.