Starting to invest. You’ve decided to start investing, but there are several basic principles that you’ll need to understand first. This guide will help you get started with successful investing. The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.
There are four things you need to be certain about before you invest your money:
- How much you are happy to invest
- That the money isn’t needed elsewhere
- You can afford to tie this money up for a long time
- You are prepared to accept the risk of loss, as you could get back less than the sum you invest.
Define your investment goals
It’s vital to establish your investment objectives at the start. Begin by asking yourself what you’re investing for and how you plan to spend any returns and gains.
You might be investing to fund a number of goals, for example, to contribute to school fees or university costs, or to help cover your own retirement costs later on.
Your investment horizon will be mapped out according to these financial goals. Investing towards retirement will mean you are in this for a long time, and could be investing over several decades. But investing to cover your children’s education costs may mean you need funds sooner, perhaps in the next 10 years, depending on their age. If you’re investing to build an extension on the back of your house, then you’ll probably be looking at the shortest term possible – although this will probably still be at least five years.
Don’t invest money you may need to use soon
Money that you put aside for investments has to be money that you know you won’t need for a number of years. It is essential that alongside your investment pot should be an emergency cash fund. This rainy day money will bring you peace of mind that if you need funds in a hurry, you will have them at your disposal. Having this emergency fund available reduces the temptation to sell longer term investments ahead of a recovery which may be just around the corner.
Put your money to work and give it time to grow
The main appeal of investments is that they offer the potential for higher returns than those offered by savings accounts.
With this potential comes greater risk, so you must be prepared for the fact that there are no guarantees you’ll get a higher return or even get back what you invested.
A key point to remember is that investments need time to grow. That’s why a long-term approach is essential. The longer you’re able to leave your money, the more likely you are to make a profit.
Top up with regular contributions as soon as possible
You don’t necessarily need a big lump sum to start investing. You can make regular monthly contributions if you prefer.
Don’t be discouraged if what you can first afford to put aside on a regular basis seems like a small sum. Getting into the habit of putting investment money aside is the most important thing. You can use opportunities such as salary increases, bonuses, household savings, family gifts and second sources of income to boost your regular investment payments.
The good news for regular contributors is that paying small amounts of money into your investment account over time might buy you more shares in the long run than a lump sum. This is because when markets are falling, you will be buying more shares as prices are low. However, the reverse is also true, so you buy fewer shares when prices are high. This investment style is known as ‘pound cost averaging’.
Use up your ISA annual allowance first
It’s vital to consider making the most of your annual individual savings account (ISA) allowance, as the returns from investments held in an ISA are tax-free.
TaxAction 2015 tells us that £1.3bn has been wasted by investors not using up all their ISA tax allowances. Unused ISA allowances can’t be carried over into the following tax year, so if you don’t use it, you’ll lose it. Each year, make it a priority to check your investment ISA allowance is being fully used.
Get the best out of your pensions
Retirement planning is an essential task for all investors. Pensions are complex and it is easy to get confused by the rules and regulations of the many different types. New rules now give investors far more choice and freedom with the way they choose to invest , and for when the time is right, to take a retirement income. This makes it more important than ever to talk about all the available options for your pension with a professional financial adviser.
Make sure you provide all the relevant documentation. So, if you have a company pension, get a full list of all the benefits and status of your pension rights from the company pension manager to discuss with the adviser. You’ll want details of your entitlements under the scheme as well as an up-to-date record of performance figures (this data won’t apply to those of you in a defined benefit scheme, which is an employment-related scheme promising a retirement income linked to your salary). Your adviser will be able to suggest whether you need to change your investment choices, or even increase your company pension contributions to ensure you get the full pension benefits.
Watch out for changes in tax rules
It’s important to bear in mind that tax rules may change in the future and the value to you of any favourable tax treatment will depend on your individual circumstances.
You could get back less than you put in
All investments carry a risk of loss of capital, which means you might get back less than you invest.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
“Starting to Invest | Barclays Smart Investor,” Barclays.co.uk, 2015, https://www.barclays.co.uk/smart-investor/new-to-investing/your-first-steps/starting-to-invest/.
