Simple steps for new investors
1st Jan 2015 Managing your Money
Few of us learned how to manage our money at school. For many of us, learning how to save and invest effectively is part of a lifelong learning process. Here is our five-step plan to getting on the investment ladder.
Decide how much you want to invest—and how much you can afford
Investments are different from savings, in that they can fall in value as well as rise. So any money that you are planning for use for investment needs to be cash that you won’t need in a hurry.
Before you start investing it’s a good idea to have paid off any outstanding debts such as credit card bills and overdrafts, as the interest you may be paying on these could be as high as 18 per cent—much more than you’d earn on the average investment.
Make sure you have emergency money saved up—three months’ worth of household expenditure kept in an instant access savings account is advisable. Check you can comfortably cover all your bills. Then you can decide how much you want to invest.
Open an Individual Savings Account (ISA)
ISAs are a great starting-point for investments. All the money within them grows tax-free and you don’t have to declare it on your tax form.
You may already have a cash ISA. The rules allow you to open an additional stocks and shares ISA but the maximum annual contribution across all your ISA holdings is £15,240 in the 2016/2017 tax year and £20,000 from April 2017.
Every UK resident over the age of 16 has the same cash ISA allowance. Young adults aged 16 and 17 have an additional Junior ISA limit of £4,080 as well as the adult ISA allowance.
You can only pay into one of each ISA type per tax year. You must open an ISA in your own name. There is no option to have a joint ISA account.
You can until April 5 this year to make use of the 2016-17 ISA allowance, and after that, you lose it for this year and the new tax year begins.
Consider buying funds to spread risk
One of the most important considerations when you are starting out in investment, is to ensure that the investments that you hold are diversified. In other words, you don’t put all of your eggs in one basket.
So rather than buy individual shares in UK companies, which carries quite a high risk, you can spread your investments across many different companies by buying a fund.
Here’s how it works: your money is pooled with that of thousands of other investors, and the proceeds are used to buy a range of different companies. That way, if one company doesn’t do so well, the downside will hopefully be balanced out by a better performance from other shares.
Split your holdings among different types of investment
Having all of your ISA in shares (equities) can be quite risky, so you might want to consider spreading your investments across cash, bonds (company debt), gilts (government debt) and commercial property.
You can do this either by buying funds which specialise in certain areas or sectors or by choosing a general fund which has a mixture of cash, shares, fixed interest products and property.
As a rule of thumb, the greater the amount of equities in a portfolio, the greater the risk and the more volatile the investments will potentially be.
Read more: How to be an ISA millionaire
Hold your investments for the long term
It’s important to have a goal for your money. How long do you want to save for, and what will you use the money for? This will help you resist the temptation to spend it or to withdraw it if the market falls and your investments shrink in value for a while.
When you have a plan, you won’t be tempted to sell shares, move investments around, or chase the latest fashions. The longer you invest and the more patient you, the greater your returns are likely to be.
With investments in the stock market you should be looking at a five to ten year period, so this is not a home for money that you might need in the short term.
Where to find more information
If you are looking for advice you can use the services of an Independent Financial Adviser (IFA). Some IFAs may charge a fee for advice or they may be tied to a single company or panel of companies. They should explain this to you before any consultation takes place.
If you are happy to do your own research then there are lots of online resources to help you learn about investment. A good place to start is the beginner’s guide at the Money Advice Service, a website funded by the government to provide free and impartial advice to consumers.
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