Investing Made Simple: A Confidence-Building Guide for First-Time Investors
Essential Investing Commandments to Get You Started
By Boring Money
21 Oct, 2024
Whether you're new to the investing scene or you consider yourself a more weathered stock market aficionado, it can be easy to get sidetracked by the tsunami of information about what you need to do, why you need to do it, and when you need to do it.
Cue headache. It's why the idea of starting out in investing can sometimes feel so daunting - there's just so much information out there, how do you know how to go about it the right way? Well, we're here to help. Whether you're just getting started or you've been investing for a while, there are a few key things you should be doing to make the most of it.
Scroll down for our top investing commandments, on everything from working out the right risk level for you to how to weed out any flawed funds holding you back, with expert tips from our Founder & CEO Holly Mackay.
If I had a pound for everyone I talked to who was ‘waiting for the right time’ or ‘struggling to choose the very best provider’ or procrastinating, I'd probably be a billionaire by now! You don’t need to choose the very best of the best, and you will never pick the very best time. The golden rule is it is time in the market. Not timing the market.
Many options now let you start with small amounts – this can be as little as £25. So even if you are feeling hesitant, you can still make a start. And gradually build confidence as you go. Just remember not to judge things on the first three months – this is a long-term play which should be for at least 5 years or more, so resist the urge to log on every day and check the ups and downs!
The idea of investing your money can be daunting, especially if you've never done it before and have had a long love affair with cash savings. However, decision paralysis can keep you on the sidelines for weeks, months or even years and mean you miss out on potential growth while you're waiting around!
Holly says it's crucial to just bite the bullet and get going. Many investment platforms allow you to set up an account with very small amounts these days, such as £10, so you don't need to be worried about committing a large amount of cash from the very start if you don't yet feel ready.
And, if it doesn't go too well at the start, resist the urge to panic - remember investing should be a long-term commitment.
The tax take is higher in the UK than it’s ever been. A bit of planning can reduce how much you pay so there’s more in your bank account at the end of the day.
For most of us, the ISA is the obvious starting place to invest. Every UK adult can currently put up to £20,000 a year in an ISA – whether that’s cash or stocks and shares. Think of ISAs like a safe which the tax man can’t get in to. Any growth from your investments or interest on your cash will be tax-free. ISAs are flexible too so if you want to get your money out – you can.
In normal circumstances, you should make sure you’ve used up all these allowances before you think about investing elsewhere. Too many people have cash hanging around in current accounts, not making decent interest and not shielding their money in the tax-efficient ISA or pension.
It's easy to end up with odd investments all over the place. A General Investment Account here, a personal pension there... and so on. This can mean you're not using your ISA and pension allowances to their full potential, as you have ‘unwrapped’ income on which you're paying tax. It’s worth sorting this out by transferring investments into a tax structure.
Read up on what is crazily called 'Bed and ISA' or 'Bed and SIPP'. We kid you not. You can ask some platforms to transfer shares or funds you already own into an ISA so it becomes that year’s ISA contribution. It quarantines these investments from future tax - also good if you have spare money and can transfer investments into the tax-beneficial pension environment.
Alternatively, if you'd just like to set up a brand new account and start investing tax-free within that, head over to our ISA comparison table to browse the market, see who's most popular and read our full reviews for all the info you need before you open an account.
Not many of us have large dollops of cash to stick into an ISA, but some of us can set up a monthly direct debit to drip feed into an investment account. Lots of investment platforms will let you do this with small sums like £10-25 a month.
What I like to is to try the ‘Pay Yourself First’ method. Set up a direct debit to come out on payday and go straight into your account. That way it gets whisked away before you’re tempted to spend it. And do the same thing when you get a pay rise, because you can’t miss what you’ve never had!
Remember, there's no one-size-fits-all approach. Maybe £25 a month feels too tight right now. That's okay! Start with what you can afford, even if it's just £10 a month. The key is to get into the habit today so you can increase your pot over time.
Investing doesn't have to be all about enormous numbers or complicated strategies. Sometimes, the smartest approach is also the simplest. By investing little and often, you're setting yourself up for potential long-term success without feeling the pinch in your day-to-day life.
Many investment platforms these days are super flexible. They'll let you set up a monthly direct debit to drip-feed into your investment account. And we're not talking big bucks here - we're talking as little as £10 a month. That's less than a takeaway pizza!
Think of investing like making a snowman. At first, it can feel a bit puny and exhausting. You're rolling that tiny snowball around, thinking that you’re going to be there all day. However, after a while, it starts to get bigger a lot quicker. Before you know it, the snowman starts to look impressive with less effort.
Your investments work the same way. Those small, regular contributions start to snowball (pun intended!), and over time, you could end up with a pretty impressive sum. This effect is referred to as "compound interest" or "compounding" by the finance industry, for those of you who don’t like snowmen!
Here’s another thing to look out for. Lots of investment platforms don't charge transaction fees on regular investments. So not only are you building up your nest egg, but you're also saving on fees by investing this way.
This is the golden rule for all investors, whether you’re a nervous beginner or a seasoned pro. In practice, this means it’s not a great idea to buy one or two shares and leave it at that. Because if they go belly up, you’ve lost everything.
You can minimise the risk of picking one thing which performs badly by picking a ‘multi-asset fund’. These are a collection of multiple investments which an expert picks and manages for you – so you are spreading the risk around lots of investments, not just one or two.
You may not get the highs of picking the one technology stock that goes to the moon, but neither will you get the (more likely) bust. With a diversified spread of investments, if any one of them underperforms or crashes, you can effectively offset the losses against other, better-performing investments in your portfolio.
When you're thinking about investing, consider the key building blocks. There are 5 main types of investment that everyday investors tend to think about:
Cash
Property
Gold
Bonds
Shares
Cash, property and gold are more obvious. Bonds (not to be confused with ‘premium bonds’) are investments where we lend money to governments or companies in return for some interest along the way. The more risky the country or the company, the higher the interest rate on offer to compensate us for this. Shares – sometimes called ‘equities’ - are literally when we buy a small fraction (or share) of a company.
Generally, it’s a good idea to have a mix of the assets listed above because the movements in price can balance each other out. Let's imagine if the majority of your investments were UK shares. Now let's say something awful happened and the UK stock market took a big dip. Since most of your portfolio is based there, you'd be disproportionately exposed. Whereas, if only 20% of your investments were in the UK, you might not need to worry so much.
This becomes less of a dilemma if you're investing with diversification in mind. For example, multi-asset funds are typically well-diversified and can help you to spread your risk. There are lots of great ones which give you access to brands and markets from across the world. You can click the link below to read more about these funds and why they're good for diversification.
How are you feeling about the world? Chances are, you probably don't fancy taking on unnecessary risk when you’re a few months into new parenthood or if your company is going through a rough patch. Or maybe you've just started saving for retirement and you're full of zest because you've got lots of time to build your wealth in the decades to come.
Your personal circumstances can - and should - influence your investments, including the amount you hold in riskier assets, such as the stock market. If you're worried about your financial situation then you should be prioritising the security and steadfastness of your assets, which could mean adjusting your investments to a lower risk profile. Or, if you've got lots of time on your hands and you're comfortable enough, then you can perhaps afford to spice your investments up a little by increasing your risk exposure.
Have you got three months’ income in easy-access cash ready for an emergency? And would you be OK (in the grand scheme of things) if stock markets took a tumble? If so, time to add a bit of risk to your portfolio and aim for higher returns. Read more about risk, what it means and how to handle it in the link below.
This point is crucial. We can’t control stock market returns, but we can control how much fees and charges eat into our savings. I also think there’s some truth in ‘you get what you pay for’, and it’s a balancing act between getting a reasonable fee, but also finding a safe and credible home for your money with decent tech and good customer service.
There are two main costs for investors to consider. First up is the investment platform. Think of this as the department store where you buy, sell, and hold your investments. You will log on to the platform to see and access your investments on an ongoing basis.
Fees here typically range from around 0.25% to 0.45% a year. It might not sound like much, but remember, this is on top of the investment fees (we’re coming to this).
And then there's the cost of the things you're actually investing in. For example, if you're buying a fund, costs can vary from about 0.25% to 0.75% depending on what you pick. However these charges can differ depending on what it is you're investing in and what type of account you're holding them in.
If you pay more, this could be fine – but make sure you understand why and what you’re getting. It's like upgrading to first class on a flight. If you're getting a lie-flat bed and gourmet meals on a long-haul flight, great! But if you're paying triple for a slightly wider seat on a one-hour hop, maybe not so great.
Just remember, every pound you pay in fees is a pound that's not growing in your investment pot. Over time, even small differences in fees can make a big difference to your overall returns.
A key question I get asked is ‘How many funds should I buy?’. Some people are so scared about picking a dud, that they over-diversify and end up with dozens of funds, which becomes very difficult to manage and can end up with one fund cancelling out something another fund has done.
My approach is typically to hold a range of about 15-20 funds and to try to stick with them. This does depend a little on how much you have. If you are starting with your first £1,000, it will be less. If you have millions of pounds, you’d potentially be at the higher end of that range.
Some people get so worried about picking the "wrong horse" that they hold more than 50 funds - taking diversification to the extreme. Though it comes from a good place, this can unravel any good work from your fund managers.
As a general rule of thumb, 15-20 funds is a sensible number - depending on the amount of money you have to invest. If you’re holding many more than that, you’re probably over-diversified and won’t be getting the benefit from the actively managed funds you own. If this is the case, consider trimming back to a more focused portfolio!
Is your fund rubbish? Whether it was great and is now rubbish or has always been rubbish and you just don’t want to admit you made a mistake, you should check. In this respect, Bestinvest’s ‘Spot The Dog’ guide – which identifies serial underperforming funds that probably should be avoided – can be helpful.
When your investments aren't working hard enough for you, judging when to sell can be tricky. Selling because the numbers look bad over the course of a single year is quite often silly - you’re guaranteed to spend money on transaction fees, making the platforms richer and ensuring that you’re always playing catch-up! But if it’s a turkey, and the majority analyst opinion is that it’s a turkey, then it might well be time to sell.
It's a good idea to look at a minimum of 3 well-known research houses or investment platforms to see if there is a consensus view from the number-crunchers themselves. Try Charles Stanley Direct, Hargreaves Lansdown, Interactive Investor, and Morningstar as a few options to do your research before selling - so you don't end up letting go of something that could be on the brink of a recovery.
Reviewing your funds every 6 months is a decent approach, as is not panicking when we hit the inevitable global shocks - whether this is a Covid-style pandemic, a stock market wobble or geopolitical tension. Having a long-term approach to the stock market is an important mindset for success.
Another important discipline is not to tweak or fiddle too much. If we react and respond to every market downturn or wobble, or a period of underperformance, we risk always chasing yesterday’s winner when what we want is tomorrow’s winner!
Equally, it's easy to fall in love with those investments that have done well for you. If you’ve made a load of cash in one type of asset, it’s easy to think that will go on forever. But it probably won’t, so it's worth rebalancing your portfolios every now and then to stop you having too much in a handful of holdings that have done well in the past.
Consider the importance of staying diversified and holding a blend of different assets, regions, sectors and/or themes. Don't be tempted to pile everything into what has worked well for you in the last year - it might not be able to replicate this behaviour! Appreciate what has performed well lately but maintain your overall balance to protect your portfolio from any sudden dips.
Beginners should remember to keep it simple, stay diversified and be cautious of anything that promises guaranteed, or supersonic returns which sound too good to be true. And finally, there is no perfect time and you’ll never get the timing just right. You just need to take a deep breath and start.
