Have you thought about investing but are worried you don’t know enough to start? Research suggests that if you do, you’re not alone, but getting to grips with the basics doesn’t have to be challenging. According to a Royal Mint survey, more than half of UK adults want to get into investing. It’s a step that can help them grow their wealth and reach long-term goals. Yet, the majority (76%) said their lack of knowledge is holding them back. If you’re putting off investing because you don’t feel confident in your knowledge, here are the basics you need to know. What does “investing” mean? An investment simply means purchasing an asset with the goal of generating an income or the asset appreciating in value. However, when people say “investing” they will often mean purchasing stocks or shares, which is where you purchase a share of a company. For many investors, it will also mean investing through a fund. A fund will pool together investors’ money and use this to invest in a range of businesses. This means you don’t have to make day-to-day decisions about how your money is invested, the fund will do this on your behalf. There are many different funds available to choose from and we can offer advice on which ones are appropriate for you. Selling investments that you hold could generate a profit if the value of the investments go up. So, in principle, investing is simple. It’s where you buy a share of a company to create income or profit. However, there are a lot of other things to consider and it’s normal to be worried about making the “wrong” choice. Here’s what you need to know. 1. You need to set a goal and a time frame If you’re thinking about investing, you should start with your “why”. Why do you want to invest, and what do you hope to achieve? Whether you’re investing for a goal that’s five years away or thinking about a retirement that’s 30 years away, your goal and time frame play a pivotal role in how you should invest. 2. All investments carry some risk All investments carry some form of risk. So, it’s important to make sure that you’re in a financial position to invest first. Ideally, you should have a rainy day fund in place that you can fall back on if you face unexpected costs. The level of risk involved when investing varies a lot. You need to understand what level of risk is appropriate for you. A risk profile should consider a variety of areas, from your capacity for loss to what other assets you hold. If you’re not sure what your risk profile is, we can help you. 3. You should diversify your investments With a clear risk profile, it’s important to start building a portfolio. While it can be tempting to put all your money in a handful of investments you have confidence in, spreading your investments is important. The stock market can be volatile, and there will be times when investment values fall. Spreading out investments across geographical locations, industries, and more can help balance out the rises and falls that investments experience. 4. You don’t need to pick individual stocks Investing through funds is appropriate for most investor. When you invest in a fund, your money is pooled with other investors’ money. This money is then used to buy and hold investments on your behalf. This means you don’t need to make investment decisions day-to-day and can help you diversify where your money is invested. There are many different types of funds to suit your needs and goals. 5. There are tax-efficient ways to invest When investing, you may be liable for tax on the returns. Choosing a tax-efficient wrapper to place your investments in can make your money go further. This includes a Stocks and Shares ISA. You can place up to £20,000 into ISAs each tax year and investments held in an ISA can grow free from Income Tax and Capital Gains Tax. If you’re investing for the long term, with retirement in mind, a pension can also make sense. Assuming you don’t exceed allowances, your contribution benefits from tax relief and will be invested. There are two allowances to keep in mind: The Annual Allowance, which limits how much you can tax-efficiently place into pensions each tax year. For most people, the Annual Allowance will be up to £40,000 for the 2022/23 tax year, or 100% of your earnings. However, if you’re a high earner or have already taken an income from your pension, it may be lower. Please contact us if you’re not sure what your Annual Allowance is. The Lifetime Allowance is the total amount of pension benefits you can build up tax-efficiently. As it is the total amount you in your pension, you will need to include employer contributions, tax relief, and investment returns. For the 2022/23 tax year, the Lifetime Allowance is £1,073,100. Keep in mind though, that you won’t be able to access the money in your pension until your reach pension age, which is currently 55, rising to 57 in 2028. 6. The cost of investing matters too When you think about how to measure how successful your investments are, you probably focus on the returns. But you also need to consider how much it’s costing you to invest. Even when you choose a tax-efficient way to invest, you will need to pay fees. These costs will vary depending on the provider and platform you choose, so it’s vital you understand how these could add up in the short and long term. 7. You can seek investment advice Finally, you don’t have to go it alone when investing. Working with a professional means you have someone to talk to about your decisions and this can help you have confidence in the steps you take. By choosing a financial planner, you can make sure the investments you make fit into your wider financial plans. If you’d like to talk about investing, whether you already have a portfolio or want to start, please contact us. Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
