15 investment lessons you need to know

With interest rates on savings accounts remaining low, experts continue to recommend we at least consider investing. However, if you've got little experience of the investment world, dipping your toe into the market for the first time can be a daunting experience.

So to help you on your way to stellar returns, here is a crash course for new investors keen to make the most of their money.

1: DO know how much risk you're willing to take?

Aside from savings accounts, all investments involve some degree of risk. Some, like government bonds (so-called gilts), are very low-risk, while at the other end of the scale buying individual shares (stockpicking) is particularly high-risk.

So be clear about the level of volatility you're comfortable with and whether you're prepared to lose any money - this will depend on how much you want to invest and how long your timeframe is before you'll need to call on the cash.

If you're happy to invest for at least 10 years, for example, you will be able to take on a higher risk because any dips in the market are likely to be smoothed out over the longer term.

2: DON'T invest money that you could need in a hurry

If you're planning on buying a property in a year's time, for instance, it's unwise to put your money in the stockmarket as this requires a medium-to-long-term timeframe of five years or more.

A two-year bond would also be a foolish option in this scenario as your money will be locked in until the bond expires.

Think very carefully before tying up your money in an account where it's either unwise or impossible to get your hands on it for some time – unless you know you won't need it.

3: DO use your ISA allowance

If you haven't used your ISA allowance, this should always be your first port of call.

Once you've got into the habit of using your ISA allowance, you can top it up each year and benefit from compound growth over the long term.

Of course, the government limits the amount that you can shield from the taxman in individual savings accounts.

Once you've invested your annual limit you cannot pay more in, even if you have made a withdrawal.

You can transfer cash ISAs from a previous tax year from one provider to another without having an impact on the current year's allowance.

However, many of the cash ISAs with decent rates don't accept transfers in, so if you are shopping around for a new home for last year's cash ISA you need to make sure you read the small print before comparing rates.

Until April 2008 you couldn't move money between stocks and shares and cash ISAs, but the rules have changed. You are now able to transfer money from a cash ISA into a stocks and shares one.

This will allow you to start your savings in a cash ISA, if you don't want to risk them on the stockmarket, and then roll them over into stocks and shares ISAs when you've built up a larger fund and are happy to take the risk.

Unfortunately, however, this won't work the other way round, so you can't move your money back into cash.

4: DON'T put all your eggs in one basket

Plumping purely for a specific market or sector may prove a foolhardy tactic over the long term. Similarly, sticking to cash accounts is unlikely to give you the best returns.

It's much better to opt for a mix of cash, bonds, equities and property so that if one performs badly, another will hopefully make up for any loss.

5: DO invest for the long term

Smoothing out the highs and lows of the stockmarket means sitting tight and riding the rollercoaster for the long term.

Moving your money out after a short period will probably mean you miss out on maximum gains, so aim for a minimum five-to-seven-year timeframe.

6: DON'T panic

The one thing that's certain about the market is that it goes up and down, and sometimes does so quite erratically – so don't panic and sell when the chips are down.

7: DO keep a balanced portfolio

'Balance' describes the mix within your portfolio between different types of investments.

Since different types of investments have different risks associated with them, finding the right balance within your own portfolio can help you create one that you will be comfortable with for the long term.

8: DON'T forget tax-free vehicles

Keep as much of your hard-earned cash as possible out of the taxman's grasp. First of all, this means using your ISA allowance.

If you're willing to take more risk and have a hefty portfolio, you may wish to consider other tax-efficient vehicles, such as venture capital trusts (VCTs) or enterprise investment schemes (EISs).

Both of these offer a number of tax breaks, including tax-free capital gains, although with the EIS you have to wait three years before this applies. However, both VCTs and EISs are high-risk investments, so seek advice from an IFA before considering them.

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9: DO understand your investments

There's no point picking a structured investment product, for example, if you're not entirely sure how it works.

Whether you're investing in bonds, the stockmarket or a simple cash account, you should read the terms and conditions to find out exactly where you are putting your money, so you avoid any nasty surprises in the future.

10: DON'T attempt to time the market

'Buy low, sell high' – we've all heard this mantra of investing. The problem, of course, is that it is very hard to determine when a stock or the market is high or low.

Even the experts frequently get it wrong, so investing regular sums is a wiser strategy for the average investor who can't afford to see their savings wiped out at a stroke. 

By investing regularly, you can benefit from buying a greater number of shares when the share price falls, resulting in higher overall investment returns when a recovery takes place. This is known as 'pound-cost averaging'.

11: DO keep some cash aside

While it can be tempting to be brave (or foolhardy) and plunge all your money into the stockmarket in the hope of high returns, you should always hold a sum in cash in case of emergencies.

Ideally, this should amount to around six months' salary in a top instant-access cash account.

12: DON'T chase returns

Like fishing, the topic of investing always includes stories of 'the one that got away'. Pick up any publication on investing and you will see list after list of the 'best' funds or stocks and their extraordinary returns.

But today's star performers may be tomorrow's 
dog funds, so don't treat these lists as gospel.

13: DO keep an eye on charges

Companies need to levy charges to cover their costs and return a profit. However, you should check to see what you're being charged on any funds you hold, as they can significantly affect your returns.

It's important to look at more than just the annual management fee. For the true cost of your fund you should look out for the total expense ratio, which takes into account dealing costs, stamp duty and auditors' fees, as well as the annual management charge.

14: DON'T neglect your portfolio

Along with the spring clean, add taking a long, hard look at your investment portfolio to your annual to-do list. Setting aside a few hours every six or 12 months can make all the difference to your portfolio performance.

Check how your investments are doing and that they still suit your risk profile, and whether charges are taking too big a slice from your money. 

15: DO seek advice

If you feel in the dark when it comes to where to invest your money, don't be afraid to seek advice. An IFA will help you survey your other assets and determine what level of risk you should take and which is the best route for you.

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