If you’re thinking about investing for the first time, your instinct may be to delay transferring any surplus cash into the stock market until the economic environment is a little calmer. With inflation at a 40-year high, the cost of living crisis, and volatile financial markets, it may seem like a good idea to hold on to your cash. However, delaying investing may not be the smartest decision for your money.
The timing of when you start investing is less important than how long you invest for, experts say, adding that ideally you should invest for a minimum of five years to help ride out peaks and troughs in stock markets. “The challenge for new investors, particularly amid the current level of market volatility, is avoiding knee-jerk reactions,” says Myron Jobson, senior personal finance analyst at Interactive Investor, an investment platform.
Bear in mind that, historically, money invested in shares generally produces higher returns than money in a savings account – over the long-term, at least. Nothing is guaranteed, of course. You may get back less money than you put in. Past financial performance is not a guide to future financial performance.
So how can first-time investors adapt their investment strategy to the current volatile economic environment? Here are five things to consider when investing.
Review your finances
Before you invest in anything, start by reviewing your personal finances. Try to pay off all high-interest debt such as credit cards or loans. According to research by PwC, the average UK household now has £16,200 in unsecured debt such as loans, overdrafts and credit card borrowing. For indebted investors, any investment profit is unlikely to outstrip interest they pay on high-interest loans, says Jobson.
After clearing debts, financial experts advise having a “rainy day” fund of between three and six months’ worth of income. This fund, ideally held in an easy-to-access savings account, covers essential living costs. It is handy if you lose your job, your income falls, or you are unable to work.
Be clear about your investment aims
It may sound like an obvious question, but “it’s important to ask yourself why you’re investing in the first place”, says Jobson. Common investment aims include helping to fund a comfortable retirement, your wedding, or saving towards the cost of your children’s university fees.
Do a risk assessment
Your investment timeframe will partly determine how much risk you are prepared to take with your money. If, say, you are in your 20s and are investing for a pension to fund your retirement, you will likely be prepared to take more risk than if you are five years away from retirement. That is because a young person’s investments will have three decades or more to recoup any losses from fluctuations in financial markets.
Typically, the bigger returns you want to make on your investment, the bigger risks you’ll need to take. “If you have a very long-time horizon for investing, probably 10 years plus, you may be suited to more adventurous [investment] funds or shares,” says Jobson. If you’re more risk averse, or have a shorter investment timeframe, you might prefer a balanced fund, incorporating bonds as well as equities. “This can help take some of the sting out of stock market volatility,” says Jobson.
Spread your money
You’re probably familiar with the investment adage of not putting all your eggs (money) in one basket (type of investment). The downside is, the amount of choice can quickly become overwhelming − especially if you are new to investing.
But you can diversify your investments through an investment fund that pools money from many investors and professionally manages a spread of investments on your behalf. To keep things simple, beginner investors often invest in a “multi-asset fund”. As the name suggests, these funds invest in a range of assets, mostly stocks and bonds, but also property and commodities such as gold. The funds are good “one-stop shop solutions”, says Jobson.
Fund managers − expert investors − look after investors’ pooled money and decide where to invest it. “You can essentially let them do all the hard work and diversify your investments for you,” says Jobson. Some investment platforms have funds designed for beginner investors. Interactive Investor, for example, showcases the best-in-class quick-start funds.
Invest little but often
One way to lower your investment risks in economically volatile times is by investing little and often, says Jobson. This approach is known as “pound cost averaging” – drip-feeding money into investments, even during a downturn, to smooth out rises and falls in financial markets and, therefore, the value of your investments.
When prices go up, your money will buy fewer shares. When prices drop, it will buy you more. Potential disadvantages of pound cost averaging include limiting your investment gains in a booming market because you’re not investing as much at one time.
Despite the current economic gloom, there are reasons for first-time investors to be cautiously optimistic. Online investment platforms mean that it is now easier than ever to invest and to educate yourself about investment. “With the advent of the internet and online investment platforms, you can invest as little as £25 a month, and with Interactive Investor you can invest monthly with no trading fees,” says Jobson. “You don’t have to have a lot of money to invest. Just do it little by little.”
Make your move today at ii.co.uk
The value of your investments may go down as well as up. You may not get back all the money that you invest. Past performance is not a reliable indicator of future results. If you are unsure about the suitability of an investment product or service, please seek advice from an authorised financial advisor.
