6 Tips on safely starting your investment journey

With inflation and interest rates attracting considerable attention in the headlines, a lot of savers are worried about protecting their cash from losing value over time. Seeking better returns than cash rates can offer, has led to an influx of new investors who are unsure of the best way to start their investment journey safely. If you are exploring investing for the first time, this article will give you six easy tips to get you started!

1.    Understand your ‘Why’.

Keeping up with inflation is one of the many reasons why you might be considering investing, but there are other reasons why you might look to start this journey, from getting on the housing ladder, paying off your mortgage earlier, building up your retirement fund or even sending your children to private school, the list is endless. 

Understanding and having a firm grip on why you want to invest, is an essential starting point when making any investment decisions as investments can fluctuate. So, it’s good to have the future in mind, knowing how long you're comfortable for your money to be invested for.

2.    Get your ‘living for today’ finances sorted

Income vs Outgoings 

I.    Make sure you can afford your annual and monthly bills and committed spending such as your rent or mortgage payments, and then look at how much you have left. It’s as simple as that. It’s important that your current arrangements allow you to live a reasonable lifestyle before you start to focus on your future needs. 

Emergency Fund 

II.    A minimum investment period of five years will give you the best chance of seeing positive returns, however this is not guaranteed, which is why it’s important that you also have an emergency or ‘rainy day’ fund held in cash, as with any investment there is an element of risk (i.e., the value of your investment can go down as well as up!). Holding your emergency money in cash means you should avoid these risks especially if you need to access the money quickly.

Building up a rainy-day cash fund means that if the value of your investments falls and at the same time you have an unexpected need for cash over and above your income, for example, a leaky roof, you can draw on the money from your rainy-day fund instead of dipping into your investments and potentially realising a loss due to bad timing of the market. This will then allow your investments to recover and importantly give you a better experience of investing.

There are different ideas on the perfect amount to hold in a rainy-day fund, ranging from three months up to a year’s worth of your fixed outgoings. The most crucial thing is determining the amount that’s right for you, within that range, so that you feel most comfortable, and if you do dip into the pot, you should look to build it back to that level when and if you can. 

A good trick is to break it down into your goals, for example short, medium and long term goals. Any cash attached to your short-term goals should sit with your emergency fund, to give you easy access to it should you need it. For all medium to long term goals you can think about investing. 

Paying off high-interest loans 

III.    If you do have any money over your outgoings, it might be better to pay off high-interest loans before investing, as this can free up more cash over time, which you can either save or invest. Also, expensive debts, such as credit cards, can build up high interest very quickly, and if you offset this against any returns on investment (which aren’t guaranteed), you may have been better off just paying off the loan. 

3.    How much? 

Once you have assessed your income vs your outgoings, have a comfortable rainy-day fund in place, and have potentially paid off your high-interest loans, you can then look at how to invest. You may only feel you have a few hundred pounds left and that investing may not be right for you, as there is a massive misconception that investing is exclusively for the wealthy, but this simply is not true! With Investment Champion, you can start investing as little as £100 per month or a minimum lump sum of £1,000 – or both, it’s up to you and what you feel is most affordable. 

If you are new to investing, it may be better to start small to get you used to things, and also to help smooth out buying at high and low points in the market.  

4.    Assess your risk - how risky do you want to be?

We’ve all heard the rushed risk warnings and disclosures at the end of adverts, including investment company adverts stating, “the value of your investments can go down as well as up.”  But it is important that when you are considering investing, you do not skip past this key step and that you really assess your attitude to risk, as this statement is indeed true. 

It’s an essential part of this journey with many questions you need to ask yourself before you can work out where to start investing. 

To get more insight into understanding your attitude to risk please have a read through our Emotional Investing article here, that provides you with a full guide on the different areas of risk that you should consider, including understanding your appetite to risk and tolerance, capacity for any loss on your investment and your knowledge and experience before investing. 

5.    Think about your investment preferences

You’ve assessed your attitude to risk and are now thinking about how to navigate what can often seem like endless investment options available, from stocks and shares, to property and even gold! Whilst in theory you could invest in each of these options individually, funds can be a good alternative for beginner investors. 

Investing in a single asset class, for example shares, can be a very risky investment strategy as you essentially have all your eggs in one basket. It also requires a high level of due diligence on an ongoing basis which most people simply don’t have the time for! 

Funds are a good alternative, where the allocation to each asset class is decided by a fund manager and is either actively managed (meaning a professional or team of professionals will actively track the performance of your fund), or is tracking a particular market index, for example the FTSE 100. The key here is that you don’t need to monitor the underlying stocks yourself.  

Within the space of investing, you may have sustainable preferences regarding your investment choices and wish to invest in companies that have a positive impact on society. Our ESG (Environmental, Social and Governance) range of portfolios are a suitable option if this is important to you when investing.  

The in-house investment team at TPO have designed a core range of portfolios to work for people with different investment goals and attitudes to risk.  The portfolios have different balance of equities and bonds, both of which have a history of producing returns, over periods of five years or more, that are higher than you would get from cash. Each contains a diverse mix of funds so that your eggs are not all in one basket and no single holding dominates performance.

6.    Make use of tax-efficient tax wrappers 

Lastly, finding a ‘home’ for your investments is key, and a good place to start is looking at tax-efficient wrappers such as ISAs and pensions -  both allow your investments to grow free of dividend and capital gains tax. 

Stocks & Shares ISA 

The annual allowance for the current tax year is £20,000 and has an additional benefit of all income being tax-free too. 

Pensions 

As a general rule, the maximum you can invest into a pension is dependent on your relevant UK earnings, and the annual allowance of £40,000 contributions, and 25% tax-free cash when you look to draw on your pension. In terms of tax benefits, on personal pension contributions you will receive 20% tax relief on your contributions.

It is important to note that you are unable to access pension funds until you’re age 55 which will be increasing to 57 from 2028. 

If you want to learn more about how we can help with your own investment journey, why not take a look at our products page or contact us for further assistance.
 

Please note: The Financial Conduct Authority (FCA) does not regulate tax planning.