Investing can be simple, more rewarding than holding cash — and can even be fun. Here’s how to get started
Watching your hard-earned savings increase by a meagre one or two per cent each year can be frustrating. Regularly moving your money around to chase the best deals can get you a better return, but if want to make your money work harder still, it may be time to consider investing.
With a cash account you can’t physically lose money. Even if interest rates are paltry, your balance will at least always rise. So by comparison an investment that sees the value of your money rise and fall can seem risky.
However, that doesn’t mean saving in a cash account is not totally risk free. “If you choose to leave money in savings for the long term, there’s a real risk that it won’t grow fast enough to keep pace with infla-tion. You could put your money in a competitive easy access account paying 1.35% – but this is lagging behind inflation, which is currently running at 1.4%,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown. “This means that your money is losing its spending power.”
To put that in perspective you’ll need £133 today to achieve the spending power of £100 in 2010, accord-ing to Hargreaves Lansdown (based on a 33.5% increase to the cost of goods and services since 2010).
As the value of investments can fall as well as rise, there is a possibility that you could end up in a worse position, with less money than when you started. However, Jason Hollands, managing director of business development and communications at Tilney, says that if you can leave your money invested for at least five years, the reward should be worth the risk. “Investments do rise and fall in value but the longer the time horizon you have, the greater your ability to ride these out,” he says. “A younger person tucking away money they might not need to access for decades can take a lot more risk than a 60-year-old look-ing to retire in a couple of years.”
Although future performance is not guaranteed, figures from Fidelity show that over the past five years £10,000 in savings would have grown to £10,113, or to £13,561 if it was invested across the UK stock market. Over 20 years the difference is more marked, with savings at £12,109 and the investment worth more than double at £27,069. (see table above).
The importance of being able to leave your investments to ride out the ups and downs of the stock market means it is also sensible to keep some money tucked away in an easy-access savings account for the proverbial rainy day. This ensures that if you are hit with an unexpected expense, you won’t be forced to cash in your investments, especially as they might be at one of the low points on their stock market journey. Hollands recommends keeping between three and six months’ living expenses as a safety net.
Myron Jobson, personal finance campaigner at interactive investor (Moneywise’s parent company), adds: “Risk is an inherent part of investing, but is tough to balance. Take too much risk, and you might rack up some painful investing lessons. Taking no risk in the case of cash savings is a risky strategy in itself – and it could have a hugely detrimental effect on your finances in future because you might not reach your financial goals.
“So it is important to get your risk profile right. You might be happy to embrace double-digit returns in the good times, but can you take the rough with the smooth?”
Saving v investing - £10,000 initial investment
FTSE All Share
Figures to 31/01/20 Source: Fidelity, savings figures Morningstar UK Savings 2500
Where to invest
With time and some rainy-day savings on your side, it’s time to decide where to invest. There are thousands of shares in different companies that you could pick from, but Ed Monk, associate director at Fidelity, recommends starting with a fund.
These are investment vehicles, where your money is pooled with other people’s, and invested across anything from a couple of dozen to a few hundred different shares. “A fund gives you instant diversification, which reduces the risk of investing,” says Monk. “If you invest in the shares of just one company and it performs badly, it will hurt. Invest in a fund that holds shares in 100 different companies, and the bad fortunes of one or two will usually be offset by strong performance from others.”
As well as offering some protection from the poor performance of the few, investing in a fund takes some of the pain out of managing your money.
“You will benefit from the manager’s expertise and their resources but they will also ensure the fund stays in line with its investment objectives by buying and selling the shares to rebalance it for you,” explains Tom Rosser, investment research analyst at The Share Centre.
It’s also easy to know what you are getting with a fund. Funds are divided into different sectors, such as Global, UK Smaller Companies and Technology and Telecommunications, so you can see broadly where your money is going, with further detail included in the individual fund’s objective.
Access to the investment professionals does cost, with an annual charge deducted from the fund to cover administration, trading costs and the fee for the manager and their team. “Actively managed funds typically have annual costs of 0.65% to 0.95%,” says Hollands. “The more specialist the fund, the higher the costs will be.”
These figures might sound small but they can make a difference over the long term. For example, investing £50 a month into a fund with an annual charge of 0.95% would cost £2,022 in charges over a 20-year period, assuming annual growth of 5%. In comparison, a fee of 0.65% would only cost you £1,409.
Although charges can make a significant difference to what you end up with, it is important not to get too hung up on them. A good fund manager can earn the extra by delivering better performance, so make sure yours is earning their fee.
You may also want to consider a lower cost option – an index tracker. Run by computers rather than a manager, these are funds designed to follow a specific market index, for instance, the FTSE 100 or the FTSE All Share, at a low cost. The FTSE 100 is a list of the 100 biggest companies listed on the London Stock Exchange, while the FTSE All Share is all of them. Annual charges can be as low as 0.07%, but up to 0.25% for some of the more exotic trackers.
These minuscule charges can be very compelling but it is important to understand how they differ from actively managed funds. “Trackers are designed to follow the index so performance will be very similar,” explains James Higton, financial planner at Quilter. “Conversely, a fund manager will try to beat the market and pick shares that outperform. This active approach comes with higher charges, so they will need to beat the market by at least the difference in charges to outperform a tracker.”
That is great when they do streak ahead of trackers, but it is far from guaranteed. As an example, Higton says that 25% of active managers have failed to outperform the US Dow Jones index over the past few years, although that does mean that 75% have proved their worth.
While you might want to weigh up whether to trust the humans or the computers, Coles says there’s no right or wrong choice. “Often investors will mix and match the two types of funds,” she says. “You might start with a tracker or two and then, once you have some experience and more to invest, spread your investment out using active managers too.”
Picking your investments
With thousands of funds on offer, research is essential. While you can spend days comparing fund manager’s strategies and past performance, Hollands says there are some handy shortcuts. “Many online investment services provide research on funds, including fact sheets that provide performance analysis, details of where it’s invested and so on,” he says. “Most will also have lists of preferred or rated funds to help you whittle down your options.”
As an example, Moneywise’s First 50 Funds lists some good options for beginners, including actively managed funds and index trackers. Selecting from this list can be a good starting point.
Once you know what you want, you need to start investing. Although you can go directly to the fund management companies, a platform such as interactive investor, Hargreaves Lansdown or Fidelity FundsNetwork may be a better option. Rosser explains: “These are like a supermarket for funds. You can get everything you want in one place and it’s often cheaper than going direct.”
It’s also easier to manage your investments. You can see instantly how your investments are performing and switch between funds and fund management companies quickly and easily. Platforms also offer plenty of research information and tools to help you get more out of investing.
However, you do pay for the privilege, with platforms charging a variety of fees. The nature of these fees varies between platforms but can include an annual charge, dealing fees and exit charges. Many charge a fee based on a percentage of your total investment, which can work out more competitive if you’re only investing a small amount, while some levy fixed fees, which can suit larger investors.
Rosser recommends doing your homework first. “Different charging structures will suit different investors so explore all the charges before picking,” he says. “It’s also worth looking at the research and tools they offer and the usability of the platform as this will affect your experience.”
Using a comparison tool such as comparefundplatforms.com can help you crunch the numbers and find the platforms that are most cost-effective for your investments.
Supercharging your investments
Once you know what you want and where you want it from, there are some ways to maximise the value you get from your investments. First, even if you’re starting out small, it is worth putting your investments into an individual savings account (Isa).
This is a tax-free wrapper that allows you to save and/or invest up to £20,000 a year without having to pay any tax. “No matter how much your investments grow, you will never have to pay dividend tax, income tax or capital gains tax on your investments,” says Coles. “This might not seem important if you’re only investing a small amount but it could save you a small fortune in tax in the future.”
You may also want to consider whether to invest on a regular basis. Little and often fits well with a monthly salary, turning your monthly investment into a good habit, but it also delivers some additional benefits.
“If you invest a lump sum, you’ll be trying to guess the best time to do this but you don’t need to worry about timing if you invest on a monthly basis,” says Rosser. “Some months you will be able to take advantage of lower prices, which will make up for the months when the price is high. This is known as pound cost averaging and it suits the ups and downs of the stock market.”
Even if you have a lump sum to invest, you might want to split it and phase your investment. Monk says this makes it easier psychologically.
“Invest in one go and, if prices fall, you could regret not waiting. Split it into two or more chunks and at least one of those investments will have been at a lower price.”
However you choose to invest, just getting started is probably the most important investment decision you’ll make. You have ample time to hone your skills so don’t get too bogged down about picking the best value platform or the top performing fund – you should still get better returns than a savings account over the years.
“One of the biggest barriers to investing is the fear of making mistakes,” explains Monk.
“Don’t worry about this: someone investing in the most hands-off way can be just as successful as someone who spends all their time studying the markets. Start small and enjoy learning about how investing works.”
One stop-shop recommendations for beginners
There are thousands of funds available for investors but these are a few recommendations that experts believe could make a good first choice.
Sarah Coles, Hargreaves Lansdown
Legal & General Global Index (T)
“A tracker is a great place to start and we like this one, or the Legal & General UK Tracker if you want to start closer to home.”
Aviva Investors UK Listed Equity Income
“This looks for companies with cash to pay dividends and to ensure those dividends continue to grow. The managers have a strong track record, although there are no guarantees this will continue.”
Ed Monk, Fidelity Vanguard Index Trackers (T)
“A low-cost way to get exposure to markets, including global and UK options.”
BNY Mellon Long-Term Global Equity
“Holds well-known names such as Microsoft and Mastercard but also big names from the Asian markets.”
Dzmitry Lipski, interactive investor
Vanguard LifeStrategy (T)
“Offers a ready made one-stop shop solution for those with modest investment knowledge.”
Royal London Sustainable Diversified Trust
“Refrains from common ethical investing no-nos, including companies that cause significant environmental damage and test products on animals as well as those involved in the production of tobacco and armaments.”
Tom Rosser, The Share Centre
HSBC FTSE 250 Index (T)
“Gives exposure to the 250 largest companies after the 100 found in the FTSE 100. This means the companies are smaller and generally more domestically focused.”
“Invests in equities on a global basis and has performed very well over the long term.”
(T) = tracker
Is investing right for you?
These five questions will help you assess your appetite for risk and investing.
Q1 How long can you tie your money up for?
A Six months, although my car/TV/phone is on its last legs so I might need it earlier
B A year, maybe two
C Five years or longer
Q2 Which best describes the state of your finances?
A My credit card is maxed out and I just about make it through to pay day
B I’d love to be able to put some money aside but my income all goes on my living expenses
C I’ve got an emergency fund that would cover me for a few months if I lost my job and I’ve usually got some spare cash at the end of the month
Q3 How would you feel if you checked your investments and the £100 you put in two weeks ago was only worth £89?
A No! That’s a disaster, I’d want to take it out and stop it falling further in value.
B A bit annoyed but I’d hope it would recover quickly.
C That’s the stock market. Doesn’t it make it a great time to invest?
Q4 Your fund has increased by 5% over the past year but your friend’s fund has increased by 15%. What do you do?
A Switch. It must be better. I want some of that.
B I know I’ve picked a good fund but maybe they are right. I will switch half of the fund into theirs.
C Compare the two funds to see why they performed differently while also monitoring performance over the next month or so to see if I need to take action.
Q5 What would you do if global stock markets fell by 20% and then flatlined?
A Panic! Then sell everything.
B Hold tight. If I sell, I’ve made a loss.
C Ouch, that’s hard, but on the bright side, it’s a great time to invest more.
Mostly As – you might not be ready to start investing, either because your own financial situation isn’t in order or you are overly cautious. Don’t despair, though. Keep reading about investing and you’ll be a natural when your financial situation allows it.
Mostly Bs – proceed with caution. You’ve got the right idea about risk and investing but make sure that you’ve got an emergency savings pot in place and you can afford to leave your investments untouched for at least five years before you start to invest.
Mostly Cs – congratulations, you appear to have a great handle on investing. Keep learning about investing and you’ll enjoy it even more.