Investing is one of the more lucrative ways to earn money. Instead of relying on your trading your time to earn a wage, the goal is to put your money to work, allowing it to make you more money even whilst you sleep.
There’s no one-size-fits-all method when it comes to investing. It will vary from person to person and depends entirely on your needs, risk tolerance, and budget.
However, for beginners, taking a more passive and long-term approach is recommended whilst you learn the fundamentals. But, it can still be a daunting task, with novices often being overwhelmed by the amount of information available.
That’s why we’ve created these top 10 tips for those new to personal finance. We’ll explain what different investments you can put your money into and how to ensure you maximise your earnings by sticking to the proven basics.
What are ten tips for first-time investors?
Our top 10 tips for first-time investors cover all facets of investing. From recommendations relating to your psychology, such as not being an emotional investor, to more practical tips, like how to get your financial affairs in order before you start investing.
Of course, this list is far from exhaustive. However, for a beginner investor, these tips will provide the foundation upon which you can build your knowledge. Before diving into the actual tips, though, let’s look at some of the most common types of investments out there.
What are the different types of investments you can put money into?
Stocks and shares
When most people talk about investing, they’re thinking about shares. Shares are when you purchase a small (or large) piece of a publicly traded company on the stock market. This means that when the company does well and its share price increases, so do the value of your investments. You can either continue to hold the particular investment, hoping it will keep going up, or sell these shares for a profit.
Once you own shares in a company, it will also pay dividends to you. Dividends are given to investors as a ‘thank you’ for supporting them. They are paid out using a small portion of the company’s profits.
The benefit of investing in shares is that you can select the company you’d like to invest your money into. Whether that’s a large multinational corporation such as Apple and Microsoft or a smaller company whose mission you believe in. If they perform well, you will be rewarded with a higher share price and a dividend payment at the end of the year. Money invested into a well-performing company can provide sizable returns, making it an attractive asset class.
The downside to investing in shares is that they fluctuate greatly, and you never know whether the share price will go up or down. It can also be difficult to analyse whether the share price you’re buying for a company is overvalued or not. As such, in-depth knowledge of the company’s financial performance, industry performance, and stock markets is required to ensure you’re putting money into a sound investment.
Bonds work differently from shares in that you’re lending your money to a company or country. With bonds, you are paid regular interest payments known as ‘coupons’, and are paid a fixed amount at the end of the lending period when the bond ‘matures’.
Because you are lending your money to a country or company, bonds are lower-risk investments compared to shares. This can be ideal for more risk-averse investors. However, your returns will also reflect this. The safe nature of investing in bonds means that you are unlikely to make huge gains on your investment.
With shares, you can select each individual company you would like to invest in. With investment funds, you can put your money into a group of shares. Instead of choosing one or two companies, you can put a little money into all, or a large selection, companies in the market.
There are three main types of funds – mutual funds, index funds, and exchange-traded funds (ETFs). Mutual funds, also known as active funds, are where a fund manager will select companies to invest in on your behalf.
Index funds, also known as passive funds, track an entire market – such as the S&P 500 – and invest a portion of your money in each company. You are banking on the whole stock market to do well with an index fund.
ETFs work similarly to index funds in that they will track an index such as the FTSE 100. But where it differs is that ETFs are traded on the stock market precisely like buying company shares.
Funds are an increasingly popular choice due to their ‘invest-it-and-forget-it’ model. All you have to do is raise money for investments and let professional fund managers do their job. Funds also include various companies, meaning that if one doesn’t do well, you can make up for it with another company.
However, mutual funds can be a little expensive. Whilst investing in shares will mean you will be charged trading fees on each transaction, investment platforms will charge you an ongoing fee to pay the fund managers that manage your investments. Index funds and ETFs generally have low fees, but mutual funds have considerably higher fees due to their active nature. Another thing to note is that you will be charged these ongoing fees even if the overall value of your portfolio goes down.
The average house price in the UK has sky-rocketed over the last few years, making them one of the most sought-after asset classes out there. However, residential properties aren’t the only form of property investment.
You can also invest in commercial properties such as shop buildings, shopping centres, and warehouses that you can rent out to businesses. If you don’t have the time to find individual properties to buy, there are even investment funds that focus on real estate.
Another popular choice for investments is precious metals such as Gold and Silver. They are a great way to diversify your portfolio because the stock market’s performance does not impact its value. In fact, you may find that if the stock market falls, people divest in favour of assets such as Gold, which then increase in value.
As with property, some investment funds focus entirely on precious metals instead of stocks and shares. Now let’s take a look at ten tips to get started on your investing journey.
1. Get your financial affairs in order before you start investing
Before you begin pumping money into stocks and shares, bonds, or any other form of investment, it’s best to ensure you’re doing so from a position of good financial health. This means you have little to no debt in your names, such as credit card or overdraft debt.
Debt will acquire interest, and if you’re not careful, your monthly interest payments may overshadow any potential gains you can make by investing. Therefore, it’s essential to put more money, if not all of it, towards paying off debts first.
Also, it’s crucial to build up an emergency fund. An emergency fund is where you have three to six months of earnings sitting in a savings account – ideally a high-interest one. Regardless of how much you plan, life will throw you a curveball. Your car might break down, your boiler may need replacing, or you can lose your job. The emergency fund can be used to pay for these things. It will ensure you have a buffer between being able to cover unexpected costs and having enough to cover living costs.
2. Have a strategy and plan
Don’t invest blindly; have a strategy and plan. Ask yourself questions such as how much are you able to invest each month, how much can you afford to lose, are you looking for short-term gains or are you investing for long-term gains, do you want to stick to the stock market, do you want to invest actively or passively, and how much risk are you willing to tolerate? Establishing a plan will help you stick to it if the market drops.
3. Start as early as possible
When it comes to investing, compound interest is your friend. Einstein once called compound interest the “eighth wonder of the world”, and there’s a good reason why. Take the following example.
Suppose Investor 1 starts investing at age 25, putting £5,000 each year in an index fund yielding 8% annual returns. They do so for 10 years. Suppose Investor 2 starts investing at age 35 and puts £5,000 each year for 30 years into the same fund. Who do you think will have the most amount of money at the age of 65?
You may be surprised to find that Investor 1 will have £787,180 at 65, whereas Investor 2 will have £611,730. That’s the power of compound interest – the earlier you start, the longer your money has to keep growing for you.
4. Invest regularly
Investing regularly is generally considered a better strategy than investing a large lump sum once or twice a year. This is due to ‘pound cost averaging’. Pound cost averaging is the idea that investing smaller amounts more consistently will help you smooth out any market volatility.
For instance, sometimes, you may buy shares when the share price is high. However, other times you may catch the shares at a much lower price, which will balance each other out over time. This will help avoid the trap of trying to time the market when share prices are down, which may not come at all and could result in you losing money in the process.
5. Take advantage of the benefits of using an ISA
It can be discouraging to make significant gains through investing, only to pay a large chunk of it in taxes. Therefore, take advantage of investing using an Individual Savings Account (ISA). The government introduced ISAs to encourage people to invest in the stock market, and all earnings from ISA investments are tax-free.
You have a yearly ISA allowance of £20,000, which renews at the end of each tax year. Once the tax year has passed, your unused allowance will not be carried onto the following year, so ensure you use as much of it as possible.
6. Don’t be an emotional investor
Investing in the stock market is like going on a roller coaster – there will be ups and downs, and there’s nothing you can do to control it. However, once you know what to expect, you can manage your emotions and act accordingly.
Don’t panic-sell every time you see the share price reduce, and at the same time, don’t panic-buy more shares when you see a slight increase. There’s no denying that seeing your hard-earned money lose its value is difficult, but selling when the price goes down makes your losses real. By resisting the urge to buy or sell impulsively, you allow your investments the opportunity to bounce back. Stick to your plan and strategy, and let the markets run their course.
That’s not to say that you shouldn’t reconsider your plan and strategy every now and then. If your plan isn’t working for a prolonged period of time, it may be a good idea to examine where you could be going wrong and what you can improve.
It’s also a good idea to reassess your strategy when it is working. For instance, you may have your money in risky investments which have gone well over the last few months. As such, you are now close to reaching your investment goal. Does it make sense to keep your money in high-risk investments where the likelihood of it losing value is high? Or should you switch to a low-risk strategy that may provide lower returns but increases your chance of reaching your goal?
8. Don’t put all your eggs in one basket
You don’t want to take on too much risk when investing. You can avoid this by having a diversified portfolio, which can be achieved in various ways. One way is to invest in companies or funds in various geographic locations, industries, or sectors. Alternatively, you can spread your investments across different asset classes, such as cash, shares, and metals. A diversified portfolio will mean that if one investment performs poorly, you may still make profits if another one does well.
9. Have a long-term perspective
A lot can happen in a year or two, so to truly benefit from investing, it’s best to have a long-term perspective. Markets can perform wildly in the short-term, which may influence how your investments perform, but over time can correct to provide you with substantial returns. Plus, the longer you stay in the market, the greater your chance of making a profit.
10. Take advantage of your workplace pension
If you are employed, you will have the choice of opting into your workplace pension scheme. Opting in is a good idea as it is free money your employer will put towards your pension.
By law, your employer is required to contribute a minimum of 3% of your salary to your pension pot. Still, some companies may match your contributions up to as much as 15%. At the very least, to take advantage of the free money, you should contribute as much as your employer can match up to.