When you first start investing, knowing when and where to invest your hard-earned cash can be difficult.
There are a number of schools of thought and myriad companies offering different solutions, not to mention the amount of get-rich-quick schemes that come and go in cycles – taking the first steps can be daunting.
So, at InvestEngine, we’ve put together this guide on getting started with investing for beginners (or anyone that’s a little rusty). For more info on all things investing, take a look at our Insights page.
What type of investments are there?
When you first start investing, it can be tricky to know which investments are suitable for you. After all, there are a number of different types of investments available for people looking to protect and grow their wealth over time.
Luckily, no matter who you are, there’s an investment that’s suited to your needs. Whether you invest in stocks and shares on the markets, or you lend money to companies and governments in the form of bonds, there are numerous avenues available, each with their own pros and cons.
Then, you have options like exchange-traded funds (ETFs) or mutual funds which offer diversification – we’ll explain this later – right off the bat and tend to offer access to a number of different businesses, sectors or asset types.
The investment universe also includes things like commodities (gold, for example), property, etc. Each investment vehicle has different characteristics that are suitable for different types of investors. Understanding how they work is important when you’re investing your hard-earned money.
What to consider when you invest
Before you start investing, there are a few key things you need to think about. Here are the most important ones:
1. Know your risk level
Not everyone has the same attitude to the risk involved in investing. Perhaps you prefer more stable, slow growth, or maybe you like your investments with more risk and therefore more potential for higher returns.
Generally speaking, those investing for the long-term are able to take on more risk than those investing for, say, a couple of years. This is because, over a long enough time period, short-term fluctuations in the value of your investments doesn’t matter so much.
So, how much risk should you take on? When you sign up to InvestEngine, our system will ask you a series of questions related to your current financial situation and your goals. From your answers, we are able to offer you a risk level that’s just right for you.
2. Set your goals
A lot of us feel like we should be investing, but sometimes we’re not exactly sure what for. Before you get started, it’s helpful to map out major milestones you’d like to hit – buying a house, saving for a wedding, etc. – so that you can plan your investing accordingly.
As we’ve established, your time horizon makes an enormous difference to the style of investing you should be doing. You can also plan to set aside a certain amount each month to help you reach your goals – this is tricky if these goals aren’t clearly defined.
3. Pay off any expensive debts
It’s important to remember that investing isn’t a get-rich-quick scheme. Sound investing is all about long-term growth. Before you start putting your spare cash into a stocks and shares portfolio, make sure you pay off any debts that are eating into your bottom line every month.
People tend to pay off things like student debt over the long-term, so this can be effectively factored into a wider financial plan. Expensive credit card debt, on the other hand, should be tackled before people start putting their money into the markets. It’s also a good idea to have a liquid rainy day fund, too.
4. Pick the right provider
This is a vital – and often overlooked – difference maker when it comes to long-term investing. Choosing the right platform to invest with can have a serious impact on the value of your investments over time, even if you’re building your portfolio yourself.
Watch out for high fees – we don’t charge any on our DIY portfolios, for example – as these can significantly eat into returns as portfolios grow. Also, make sure you won’t have to pay to access your cash early – again, you don’t with us – or give notice when disinvesting. Every company will operate slightly differently, so it pays to do your research.
What is diversification?
One important concept to understand is diversification. Put simply, this is the process of spreading your investments out across numerous businesses, geographies, sectors or asset types to spread the risk attached to each one.
In theory, any losses made in one area can be offset by gains made in another. This is why, generally speaking, diversification is used as a risk management tool. It is, in simple terms, the opposite of putting all your eggs in one basket.
We see effective diversification as a crucial part of any long-term investment strategy. The beauty of using ETFs to build a portfolio is that, on the whole, they provide diversification right off the bat. Because they can hold thousands of companies in a single asset, the risk is spread and growth should, in theory, be relatively smooth.
How to build a portfolio
Building a portfolio of ETFs is all about choice. You can choose to invest in an ETF that reflects the performance of a particular market, like the US or the UK, or you can choose an ETF that reflects a sector like AI or energy.
Ultimately, choosing the ETFs you want in your portfolio comes down to personal preference and a bit of research. Check whether or not the ETF pays an income, the underlying ETF fees, the number of companies it invests in, etc. It’s up to you to choose which industries and geographies you want to focus on.
The one key thing to consider is diversification, which we’ve already touched on. When selecting ETFs, it’s a good idea to check that there’s not too much overlap between your choices – most major tech ETFs are likely to contain one or all of Apple, Meta or Microsoft, for example.
It’s also a good idea to spread your investments out geographically. Investing in one market – focusing on the FTSE, for example – opens you up to particular market stresses and additional risk in the event that something unique happens to that area.
So, when building your portfolio you should invest with your head, your heart and keep your long-term goals in mind. A shorter investment time horizon means you’ll probably want more stable assets like bonds. A longer term investment can and probably should include more risky equities – it’s a balancing act.
Consider a managed portfolio
To a lot of people, professional portfolio management is something only very wealthy people have. In 2023, however, this is no longer the case. The rise of digital investment platforms has brought the cost of entry down significantly.
At InvestEngine, for example, our Managed portfolios cost just 0.25% a year. For the peace of mind of having a team of experienced professionals managing your investments, we think this is a bargain.
When you sign up, we’ll ask you a series of questions about your financial situation and your long-term goals. From your answers, we’ll be able to match you with a portfolio that’s just right for you.
Why should you invest?
So, you have enough information to consider getting started with an investment portfolio of your own. The question now might be why is it important to invest?
Investing is a vital part of long-term financial planning – it can help you to build your wealth, to meet your financial goals, to grow your cash against inflation, to save on taxes (in some cases) and to save for retirement.
You don’t need much to get started, either. With InvestEngine, the minimum investment is just £100, and you can set up a regular Savings Plan for as little as £10 a week. For the price of a few cups of coffee, you can start building your finances for the future and getting to grips with the world of investing.
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.