To a beginner, the world of investing can seem a daunting place. There's a lot of jargon to deal with and an awful lot of investment products to understand. And what about tax, risk and costs?
But armed with some tips and hints - and also making sure you avoid some common mistakes – it's quite easy to start investing.
Before you start
There are several important factors you need to consider before investing. Firstly, why do you want to invest? Are you investing for something specific, such as for your child's education, your retirement or for a rainy day? The length of time you're investing for will help influence what investments are suitable for you.
The next thing to consider is how much risk you're prepared to take. Julian Chillingworth, chief investment officer of Rathbones, says understanding risk is very important. "We point out to clients that there's a chance they could lose half their money with some investments. If investors don't want to take any risk, they'll be better off keeping their money in the building society."
Different asset classes, such as equities and bonds, have different levels of risk, and funds will have varying levels of risk too. Tom Stevenson, investment director at Fidelity Worldwide Investment, explains: "A higher level of risk gives the potential for greater returns but also greater losses. Conversely, if an investment takes low levels of risk, it might offer limited long-term growth potential. By taking time to think about your attitude to risk, you can reduce the chances of nasty surprises further down the line."
Armed with this information about how long you're investing for and how much risk you're happy to take, you can focus on your financial goal and how much money to invest. Remember to set aside some money for emergencies, so you don't have to pull your money out of your investments early.
Andrew Merricks, head of investments at Skerritts Wealth Management, warns: "Calculate how much ready cash you need for emergencies or expenses. Then double it. Things invariably cost more than you expect."
Now it's time to think about your investment strategy. A big part of the strategy will be around whether you're investing for income or growth, or a mix of both. In other words, whether you'd like to receive some money from your investments regularly, or whether you'd like to grow your investment as big as possible and then take all the money when you eventually cash it in.
If you're after income, you might want to look for dividends, whereas for growth you might consider the emerging markets.
Make a plan containing all this information and refer to it while you're making your investment decisions, so you don't get tempted to invest in inappropriate products. And pay close attention to our tips and secrets to ensure you get your investment portfolio off to a flying start.
Top Three Tips for beginners
1. Protect your investments from the tax man
After you've spent time building an investment portfolio, you don't want to give a chunk of it away to the tax man. Use a stocks and shares Isa to shelter your investments from income and capital gains tax. There is a limit to how much you can put in an Isa – for the 2013/14 tax year, it's £11,520. You can use the whole amount for a stocks and shares Isa or part of it (up to £5,760) in a cash Isa, with the balance in stocks and shares.
2. Don't overpay
High costs can also eat away at your investments. Thankfully, there is a variety of options for investors that want to keep costs down. If you're happy to build a portfolio yourself, check out Compare Fund Platforms (comparefundplatforms.com) to find the cheapest online platform, based on what you want to invest in. If you're interested in buying investment funds, remember passive funds (funds that follow an index up and down and are not actively managed by a fund manager) are cheaper than active funds.
Merricks points out an investment trust can be cheaper than a unit trust and "you can sometimes get a similar portfolio for cheaper". Whatever product you choose, make sure you always compare the fees (such as the total expense ratio) before you invest.
3. Do your homework
Investing requires time and commitment. Chillingworth says his best advice for beginner investors is to put the hours in – do some background reading and understand what you're investing in. "If you're prepared to invest in the equity market, take the time to understand the company – never invest in a company with a business model you couldn't explain to your mother or grandmother."
Four secrets of investing
1. Understand compounding
When your investments pay you an income, such as a dividend, you can either take the money or reinvest it back into the market.
"The power of reinvesting this income is what makes equity investments so attractive and over time the compounded growth of dividend income provides the lion's share of the total return from an investment," notes Stevenson. Garry White, chief investment commentator at
Charles Stanley, adds: "Reinvesting dividends can turbo-charge your portfolio and provide greater returns. This effectively means you are generating future earnings from past earnings." Such is the brilliance of compounding, even Albert Einstein called it "the greatest mathematical discovery of all time".
2. Don't time the market
There's no point trying to time the top or bottom of the market, as you will likely get it wrong. The best method is to decide how much you want to invest each month or quarter and drip-feed it into the market. "This forces you to invest no matter what the market is doing, helping you to avoid the poor decisions most people make when trying to time the market," comments White.
By investing regularly, rather than with one big lump sum, your investments will be smoothed by a process called pound cost averaging. According to Fidelity, investing £1,000 in the FTSE All Share index 15 years ago could have returned £2,098 but if investors tried to time the market and missed the best 40 days the same investment would only be worth £380 today.
3. Be honest about what you don't know
"Investing is simple but it is not easy and over-confidence is dangerous for investors," explains Stevenson. Even Warren Buffett, one of the world's most successful investors, avoids investing in businesses he doesn't understand. He refused to invest in internet stocks during the dot-com boom because he didn't understand the business models.
4. Learn your acronyms and ratios
It's vital you get your head around investment jargon. The terms used to show how expensive an investment is include total expense ratio and annual management charge, while if you're investing in shares there are different ways of measuring their value – comparing a share price to earnings, assets or sales are widely used methods and the dividend expressed as a proportion of a share price is another good guide. To help understand some of these terms, visit moneywise.co.uk/investing/first-time-investor.