- Think about what you want to achieve by investing and how much risk you are comfortable with
- You might want to keep some money in an easy access account for emergencies
- It could be helpful to invest small amounts regularly and spread your investments to manage risk
- Minimising investment fees might help maximise your returns over time
For beginners, the world of investing can be a daunting place – from deciding which funds to pick to simply deciphering the jargon.
But it’s important to remember that even the most experienced investor was once sitting where you are now. At its simplest, investing is about two things: protecting and enhancing your wealth.
To help get you started on your investing journey, here are a few simple tips you might want to consider. Watch our video series below to get a flavour of the investment world.
In the opening chapter of our ‘Investing for beginners’ video series, Dan Coatsworth details several benefits of investing, including capital growth, dividends and beating inflation.
Hello. My name is Dan Coatsworth and I’m one of the investment experts at AJ Bell.
Over a series of short videos, we will give some tips on why should you invest.
Whether you’re looking to build up enough to fund a house deposit, pay for your wedding, put your children through university or even support your retirement, investing can be a rewarding experience for so many people.
We’ve all got different reasons why people invest, but the journey we take can be similar. It involves picking a suitable investment account, identifying the types of investments that match your risk appetite and time frame, and knowing how to build and manage a portfolio.
I’ll go through all those points in this video series, so sit back and let me guide you on your investment journey.
A lot of people ask me: "Why should I invest? Isn’t it easier just to park your cash in the bank and collect interest on your savings?"
That’s a fair point and there is certainly merit in having some of your money held in cash. But the important thing to consider about investing is that you’ve got two sets of opportunities to grow your money, and potentially by a greater amount than you could get from investing in cash.
First is achieving capital growth. This means the value of your shares, funds or bonds increases over time. When you come to sell your investment, you would make a profit if those shares, funds or bonds were worth more when you exit than when you bought them. Just remember that investments can go down in value as well as go up.
The second way to make money from investing is through dividends. Companies or funds often pay out dividends two, three or four times a year. The beauty of dividends compared to interest on cash savings is that dividends often get bigger each year. In comparison, cash rates will stay the same on fixed-rate accounts. Many companies or funds have an unbroken record of growing their dividends every year, going back 50 years or more.
Some people like to reinvest that dividend money to buy more shares. So, the next time a company or fund pays out dividends, they should get even more money - if you keep repeating the reinvestment cycle, you benefit from a fantastic phenomenon called compounding.
If that’s not enough to convince you why to invest, there is a third and often underappreciated reason - and that’s to give you a better chance of beating inflation, which is the increase in the price of goods and services over time.
For example, if you’re getting 3% return on cash in the bank and inflation is at 5%, then your money will buy less in the future than it can today. But if you are making a 7% return on shares and inflation is at 5%, you’re still growing the value of your money in real terms.
Let me give you some interesting stats to illustrate what you’ve been able to get from investing versus cash in the past. While there is no way of guaranteeing this trend will continue in the future, it is worth a closer look.
Barclays has compared the returns from UK shares with other asset classes and then adjusted the figures to account for inflation. Between the start of 2003 and the end of 2022, UK shares have returned +3.8% on average, whereas cash returned -1.8% a year.
Remember these figures take inflation into account, so they’re called real returns. They imply that over the 20 years to the end of 2022, money invested in UK shares grew by more than the rate of inflation, but cash lagged behind.
This hasn’t always been the case. Over 50 years to the end of 2022, you would have got a 0.7% real return on cash - but UK shares would have still beaten cash, returning 4.5% on average each year after accounting for inflation.
In the next video, we will discuss the concept of investment goals. If you have a good idea why you want to build up a pot of money, it can really help to incentivise you to invest as much as possible. Until then, thanks for watching our tips on why to invest.
1. Think about your investment goal and time horizon
Most people save and invest to achieve a certain goal. Knowing what that goal is — from buying a first home to travelling in retirement — and when you want to achieve it, is a good starting point in developing your investment strategy.
2. Decide how much risk you want to take
The volatile market conditions caused by the pandemic, Ukraine war, inflationary pressure and sharp rise in interest rates were a stark reminder that stock markets can go down as well as up, particularly in the short-term.
Having determined your time horizon, a sensible next step is to consider the level of risk you're willing to take to achieve your goal. Historically, those who have invested in stocks and shares have generally been rewarded over the long term (and by long term this means decades rather than months or even years). But the price of this is often significant volatility in the short term.
Understanding your attitude to risk is an important step in any investor's journey.
3. Consider the role cash can play in your investment strategy
Even if your investment time horizon stretches out for decades (often the case for those saving for retirement), it's still important to build a cash buffer you can use if things go wrong.
Having a decent chunk of money readily available in an easy access account could be a vital part of a sound financial plan. You should consider holding at least three months’ worth of fixed expenses in such a rainy-day fund, and make sure you shop around for the best interest rate available. Take the fuss out of finding the best rates and browse the competitive rates in our Cash savings hub.
4. Weigh the benefits of regular investing
A good way to get in the habit is to consider investing relatively small amounts at regular intervals, usually monthly. You can set up a regular payment that automatically moves money from your current account into your investment account, like a direct debit, and means you don’t have to remember to do it each month.
We want to make investing small and often as easy as possible, that's why we created our regular investment service. It's easy to set up once you've opened an account and lets you invest as little as £25 each month, with a discounted dealing charge of £1.50. This also has the added benefit of smoothing out your investment returns during periods of severe market volatility. Remember, you can always add to your account with a lump sum deposit too if you find yourself with more money to spare.
5. Think about diversification
In the excitement of getting started with investing, it can be tempting to invest in lots of different things.
You’ve probably heard about ‘diversifying’ your portfolio, which basically means making sure that you’ve got a spread of different investments, and while this is important, it’s also key not to make too many investments at once.
First, it means that you’ve got way more work to do to keep track of them, and second, it means that fees will start to eat away at your money.
At the risk of sounding a bit like you can’t win, you also want to make sure you’re not putting all your eggs in one basket.
If you build up a decent amount in your investment account and invested all your money in one thing, you’re very reliant on that fund or stock doing well. You might hit the jackpot and it steadily rises, making you lots of money. But the risk with investing is that you could lose money too, and if that one investment falls in value, you could end up wiping out a big chunk of your money.
The aim of the game is to get a decent spread across funds or stocks, but also across different investing areas.
6. Keep your costs as low as possible
One of the best ways to maximise your investment returns over the long-term is to keep your investment costs as low as you possibly can. While differences in costs may appear small in percentage terms, over years the difference in outcomes when you’re paying 0.25% versus, say, 0.5%, can run into thousands of pounds.
How to get started and fund your account
Don't imagine that to start investing, you need to have a lot of money to hand. While you can begin by funding your account with a cash lump sum, there are other ways to take your first steps:
- Lump sum – you can start investing with AJ Bell by funding your account with £500 or more
- Transfer an account – if you have an account elsewhere (an ISA, for example), it’s easy to transfer it to us
- Regular investing – a popular way to get started is with our regular investing service, which lets you put as little as £25 a month into an investment of your choice. Taking it slow and steady isn’t just more forgiving on your finances, it can also cushion you from the ups and downs of investing, and save you from having to worry about ‘timing’ the market to find the right moment to invest. Learn more about what regular investing involves
Are your investments in the right account?
Knowing your investment goal is key to determining your strategy, but it’s also helpful when opening your investment account.
If you’ve already opened an account, it’s worth making sure the account type meets your needs, or if you’re still in the exploration phase, it’s helpful to compare different accounts to decide which one is the right one for you.
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Important information: Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser.