- Making the move towards investing can be simple with the following steps
- Only 20% of people in the UK invest in stocks and shares and 17% have a Stocks and Shares ISA*
- Those sticking solely to cash could be missing out on boosting their long-term wealth
- Six areas to consider when beginning your investing journey
Sarah Coles, head of personal finance, AJ Bell, comments:
“Before you start investing, it can feel like mountain climbing in the dark: risky, exhausting, and impossible to get a foothold. Fortunately, armed with a map and a bit of daylight, exploring investments can be a walk in the park. So there’s nothing stopping you taking your first steps.
Step 1: Get ready to go
“You might have a lump sum set aside, but if not, you can still invest. The key is to free up some cash every month. The most sensible way to do this is to draw up a budget of everything coming in and everything you’re spending. That way you can identify the fat you can trim from your budget, and see what you have to work with.
Step 2: Make sure you’re in the right place financially
“Before you jump into investing, you may want to use the cash you’ve freed up to address potential holes in your finances. This can mean addressing your debts. This isn’t about long-term borrowing like mortgages and student loans, it’s short-term expensive debts like overdrafts and credit cards. In February, the average rate for both was around 22%, so it makes sense to pay these down first.
“On paper you should ideally repay these debts, cut up your cards and funnel your money into investing instead. In reality, many people borrow on and off for decades, so waiting for the perfect debt-free moment will simply mean you never get round to investing. It means that in many cases, the priority will be to get on top of your debts, but if you’re able to you may want to invest alongside regular debt repayments.
“Consider your emergency savings too. While you’re working age, you should be saving cash to cover 3-6 months’ worth of essential spending. How much you actually need is different for everyone, so you should identify what’s essential to you, and calculate how much you spend on it each month. Where you fall on the 3-6 months spectrum will usually be driven by your circumstances, such as your state of health and how many people are relying on you. On top of this, if you have any planned expenses over the next five years, you should be saving to cover those.
“There will be times when you eat into emergency savings and need to build them again, or when you have a short-term expense to save towards. In these cases, there’s nothing stopping you from splitting any money you’re putting away between savings and investment pots. Plenty of people pay into both at the same time.
Step 3: Work out where you want to go
“Some people will have goals, like building a specific sum by a particular date. Investing is a long-term business, so this needs to be at least 5-10 years in the future. If you need the money before this point, it usually makes sense to hold it in savings.
“For many people, a sensible approach is to aim for steady growth over time, which means building a balanced and diversified portfolio. However, some will want to take more risk and are prepared for more potential downside in the hope for faster growth. Meanwhile, others will want to err on the side of caution.
“Don’t feel you need something specific in mind in order to get started though. Just wanting to build for the future can be enough of a goal.
Step 4: Find the best vehicle to get there faster
“Watching your money grow is incredibly rewarding. Paying tax on that growth isn’t. If you invest through a dealing account, you could pay tax on income and growth, so you can consider a Stocks and Shares ISA which protects you from it. You can put up to £20,000 into ISAs each tax year.
“If you’re investing for retirement, you could consider a self-invested personal pension or SIPP, which offers tax relief on any contributions to supercharge your growth. Bear in mind that you can’t access any of your money until you hit the age of 55 – which is set to rise to 57 in 2028. It means many people will opt to build ISAs and pensions alongside one another.
Step 5: Make it easy
“The best way to stick with an investment habit is to automate it. You can set up a regular payment into an investment account. You can also decide in advance which specific investments it will go into – so you don’t have to remember to allocate it either.
Step 6: Take the plunge
“Deciding what to invest in can be where many new investors run into a brick wall. It’s essential to be aware that there’s no single right answer. There are a variety of funds and shares that can work for you, so don’t lose sleep worrying that anything short of perfection is disaster. The trick is working out what you want from your investments, and then matching them with investments that tend to provide these things.
“You also need to build in what’s known as diversification. This essentially means investing in a bunch of different things, so if one investment suffers, it’s balanced out by others that have performed better. The easiest way to do this as a beginner is to start with funds.
“These pool your money together with other investors and then invest in a broad range of things. It means that from the first pound, you’ve already spread the risk. There’s a huge variety of funds available, investing in all sorts of things. If the choice is overwhelming, one easy way to start is a multi-asset fund, which will invest in all sorts of things from shares to bonds and gold, spreading your risk even further.
“You can build a core portfolio made up of a number of funds that specialise in particular areas – like different assets or investments across different regions. If this feels like a stretch to start with, you could consider using portfolio services offering a selection of funds depending on your aims, or consider funds specifically targeted at certain needs or risk tolerance.
“Once you’ve built a strong core, you might want to add things that reflect your aims more specifically. Someone who wants to take more risk for more potential return – and is prepared to live with losses – could opt for single company shares and funds focused on parts of the world that see more ups and downs – like emerging markets.
“Someone who wants less ups and downs might add in bond funds, which tend to be less volatile than shares over the long term. They might also opt for ‘income’ funds, which can invest in bonds and shares that have historically paid good dividends. These offer an upside in times of market falls.
“There are no set rules as to how many different funds or shares you need, but the key is balance. You want to spread the risk in a way that makes you feel comfortable, without building such an array in the early days that you pay more fees than you need to.”
*FCA Financial Lives Survey, 2024