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Moving on from savings

Moving on from savings

This month, Andy Webb helps us navigate the complex world of stocks and shares 

Our “On the Money” inbox is often full of readers wondering what to do with their savings. Frustrated by low interest rates and tempted by opportunities to make higher returns elsewhere, it’s no wonder people often write or email in to ask about how to get started with investing.

This email we received is a typical question on the topic:

I am in a lucky enough position to be able to put £500 of my earnings into investments each month but I have no idea where to start! I know nothing about stocks and shares or what is worth investing in. Do you have any tips? 

Though I’m sure many of you are already investing, this is how a sizable number of readers feel. It’s highly likely many will only have invested via their pension—and some might not even realise that their pensions are invested.

This is obviously a huge question to answer, with so many aspects to cover. But it’s actually very simple to get started on your own with basic stocks and shares investing and build from there if you wish.

How do I start investing?

First up, just make sure that your money wouldn’t be better off clearing expensive debts or building up cash emergency funds. If that’s all looked after, we’re almost good to go.

But what is investing? You’re essentially buying something which you hope to sell at a profit. Though that’s not always the casethe value of investments can both go up and down.

Over time you’d expect to see any losses replaced by gains, but there’s no guarantee. There’s even the possibility you lose most or all of your money! Ultimately the riskier your investment the greater the chance of big returns, but also big losses.

However, don’t let this put you off. There are ways to spread the risks (which we’ll get to), and it’s usually recommended that you move your money into more stable investments the closer you are to needing it. Five years should be the minimum you want cash invested for.

So where to start? Ignore all those images you have of people shouting “buy” and “sell” in movies like Wall Street, or of old men in clubs reading ticker tapes and getting on the phone to their brokers. The reality is much calmer and something you can do on your own.

First of all you need to choose something called a platform. This is a company which will let you buy all the different shares. Think of it like the supermarket you go to in order to buy the individual products.

The big players are people like AJ Bell and Hargreaves Lansdown, though you can also buy direct from providers such as Vanguard. Newer apps like Freetrade have been incredibly popular recently but these are more involved so probably not the best option for newbies.

The one you pick can come down to a few factors, but the cost is probably most important. Over time even 0.5% difference can add up to a huge amount of cash.

Once you’ve signed up to your chosen platform, you need to open an account with them. The most tax-efficient way is via an Investment ISA (also known as a Stocks and Shares ISA).

This means any money you make from the investment, whether in gains (the price you sell at versus the price you paid) or dividends (bonus payouts you get from some investments) won’t be taxed.

You can pay in up to £20,000 in a financial year across the different types of ISA, so if you do want to invest more than this, you’ll look for a general investment account.

If you don’t plan to access this money until you retire then you might instead want to invest more money in your pensionwhich has its own tax advantages and potentially free cash from your employer on top.

Next you need to decide what you want to buy. There are lots of options. You can buy shares for one company, government bonds, funds that combine multiple assets and much more beyond.

The simplest way for everyone to begin investing is to buy one of the prepacked funds. These are combinations of different shares from different companies, markets and even countries. These will hopefully mitigate against losses as you’re spreading the risk out (though there are different risk levels here too).

"The simplest way for everyone to begin investing is to buy one of the prepacked funds"

Fund choice can get a bit overwhelming, but some platforms will offer simplified options based on your appetite for risk. Or you could look at tracker funds (also known as index funds) like the FTSE 100 where your money is invested in the biggest 100 companies in the UK’s stock market.

I’m a big fan of these for most investors as you don’t need to know anything about the companies you’re investing in. They’re often usually cheaper too as you don’t need a fund manager to watch things (this is passive rather than active investing). There are ethical options too.

The last thing you need to do is decide how much money you want to invest. You can put lump sums aside, add money each month or ideally a combination of the two. You don’t need huge amounts of cash to get started. Many platforms will let you invest just a few quid.

Then leave it! If you keep looking at the performance every day or week you could get spooked into selling when the best course of action is likely to let it recover over time. Though it’s still worth reviewing your portfolio to reflect any changes you want to make to your approach or mix of funds.

And if you want to learn more I’d recommend you do some further research. It could also be worth seeking professional financial adviceespecially if you want to be active as an investor or get involved in things like property, cryptocurrency or assets such as fine wine and classic cars.

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