This article is from the Good Guide to First-Time Investing, which you can download for free here.
Trading apps for your phone. Ads on social media and YouTube. Tips from ‘finfluencers’ and friends to get in on the stock market action. The pressure to make fast decisions about investments has never been greater.
But don’t rush! Taking a considered approach to investing is far more likely to pay off in the long run than blindly following your mate’s hot Bitcoin tip.
Pay off high interest debt before investing
As of September 2023, the average annual interest rate for credit cards stood at 31.2 per cent – the highest since 1998.
Generally speaking, when it comes to credit card repayments and payday loans, it’s better to pay them off before investing. Otherwise, any gains made through investing could just be outweighed by debt.
However, if you have a credit card on a zero per cent deal and plan to pay it off in time, you might feel there’s no need to put off investing.
Know your starting point
First, work out what you can afford to invest each month – and stick to it!
Do this by creating a budget that takes into account all of your incomings and outgoings. Don’t only include your ‘every month’ expenses but also any one-off expenditures such as annual insurance, holidays, Christmas, birthdays, haircuts, car MOT and service etc.
This process will take time and effort the first time you do it, but it’s important to know how much money is realistically affordable for you to invest – both now and in the future.
Build up a savings pot first
Investing should always come after you’ve stashed away some cash (ideally at least three months’ wages) in an easy-access savings account in case of a rainy day. This is the foundation for any successful financial plan, as it will help you cope with any unexpected financial shocks. For example, a bigger-than-expected tax bill, roof repairs, car problems, temporary unemployment and so on.
Take a look at our top-paying ethical savings providers for some good options.
The silver lining of rising interest rates is that savers are finally being offered some better returns – but bear in mind that, as we cover above, these still won’t beat inflation. Therefore they should be used as part of your financial plan – not as a replacement for investing.
Don’t simply open a savings account offered by your current account provider, ESPECIALLY if this is one of the main high street banks. The big name banks have been rapped for not passing on rate rises to savers while making huge profits for themselves. Ethical providers are far more likely to treat their customers – as well as the planet – fairly.
Choose what type of investment product you want
As an investor, you will want to make the most of any tax reliefs available. It could be a Stocks and Shares ISA (enabling you to invest up to £20,000 tax free) or a Lifetime ISA (for 18 to 39- year- olds investing for a house purchase or to supplement retirement). Another option is the Innovative Finance ISA (for directly investing in projects and companies), but these are higher risk and should only make up part of your overall investment plan.
For most people, a Stocks and Shares ISA is a good starting point. See our simple table on page 16 to decide what’s right for you.
Choose a platform, app (or a financial adviser)
To ensure that your investments work for the future of the planet as well as your own, go for a platform or app that has a sustainable investment option AS WELL AS the ISA type you are interested in.
Websites and apps with a sustainable investment focus are springing up everywhere, and most are designed to be easy to use and understand.
If in doubt, you could seek out a financial adviser – see our ethical options here. Bear in mind that advisers can be expensive if you don’t have at least £50,000 to invest, but the point in having one is that you make more money than you would without one.
Choose a fund, project or portfolio to invest in
Excitingly, it’s now possible to align your investments with your personal values.
There is a lot of choice in the sustainable investing space, so spend some time thinking about what type of investments you might want to have and what companies you’d like to support.
You could also consider what industries and companies you would like to avoid. For instance, do you want to avoid fossil fuels? Remember that your investments can not only make a huge difference to your future, but to the planet’s too.
Most investment platforms now offer ready-made, positive impact portfolios (so you don’t have to pick your own funds or stocks) or fund options if you want to invest in a sustainable way.
Our Good Investment Review, compiled in partnership with Square Mile Research, looks at the key themes behind the UK’s top ethical and sustainable funds – as well as an overview of their financial performance.
When finances are tight, it might be tempting to forget about ethical principles and put your money into a short-term profit prospect like oil instead. But remember, it makes sense that investing today in the companies of tomorrow (those working on solutions to the world’s problems, not fuelling them) is more likely to pay off in the long run. It may not happen overnight, but if you believe this is the direction of travel, then you should stick with it.
In fact, research by Liontrust and The Big Exchange reveals that those people currently investing sustainably are likely to continue to do so, despite the current economic and market challenges. An overwhelming majority (80 per cent) of respondents said their view of sustainable investment had not been impacted.
Risk is an important term with investing – it relates to how much money you could make or lose.
A common mistake for first-time investors is to find an investment that’s either too risky or too cautious. This most likely happens when people take a tip from a friend, online forum or social media. Remember that when you’re investing, you need to take into account your own individual circumstances and your own comfort level with risk. Getting this wrong can make or break your first investing experience.
Taking too much risk might mean you find the ups and downs too stressful, so you never want to invest again. Too little risk might mean too little growth, leaving you discouraged.
Before you invest, work out how much risk you are comfortable taking – and can afford to take. You can use a free online tool to help you decide and many funds, like those offered by Liontrust, make it clear how risky they are so you can make the right call for your needs and goals.
Alternatively, you could speak to a financial adviser who can help you invest at the appropriate risk profile for you.
It can be worrying and deflating seeing the value of your investments going down, as many have been during the cost-of-living crisis. It can be tempting to want to cut and run, and simply stash your cash in a savings account instead.
However, during periods of volatility, the best course of action with investments is usually to stay the course and ride out the storm. Over the long term (which they are designed for), investments tend to trend upwards.
Research by Schroders based on 100 years of historical data shows that if you invested in stocks and shares for very short periods, you would have a relatively high chance of making a loss. For one month, the chance of a loss was 40 per cent; for five years it fell to 23 per cent; for ten years 14 per cent and for 20 years the chance of making a loss after inflation was zero. By contrast, holding on to cash over longer periods is highly unlikely to ever beat inflation.
Although this is encouraging, don’t forget that past performance is not a guarantee of future performance.
If you prefer not to invest a large lump sum all at once, then you can consider spreading it out; this is a concept called “pound cost averaging.”
It refers to investing small amounts of money regularly – this can help with a non-emotional approach to investing because you’ll be investing no matter what state the stock market is in, and the prices you invest at are more likely to ‘average out’.
Risk warning: The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.