Investing can bring you many benefits, such as helping to give you more financial independence. As savings held in cash will tend to lose value because inflation reduces their buying power over time, investing can help to protect the value of your money as the cost of living rises.
Over the long term, investing can smooth out the effects of weekly market ups and downs. And in the more immediate term, there’s something very satisfying in researching investments, then taking the first steps that can make your financial future more secure.
But with the main benefits of investing likely to show over the medium-to-long term, before you are ready to invest it’s worth making sure that your immediate financial circumstances are in the right shape.
Before you begin to invest it’s sensible to pay off any debts. The interest rate you pay on the vast majority of short-term debt is likely to be many times higher than the rate of return on any investment you make. You should prioritise paying off things like credit card debt and payday loans before making any investments.
So if you still have any debt, make sure you don’t miss making any payments ahead of their due date – any penalty fees/charges and the interest you incur will more than offset any gains you’d make on an investment. Missing a payment will also damage your credit score, making it harder and more expensive to get credit if you ever need it in future.
Build up an emergency cash fund before you begin to invest
They say that life is what happens to you when you’re making other plans. Sometimes good things happen out of the blue. Equally, sometimes the worst can happen unexpectedly.
Things like redundancy, a change in domestic circumstances or a health scare can come as a shock, often when we’re least expecting it. And, at a time when we’re least prepared for it emotionally, coping with emergencies can also put a huge strain on your finances.
So before you invest, it makes sense to be prepared financially for life’s ups and downs.
It can bring you peace of mind to have a decent financial buffer in reserve, so it makes sense to build a rainy day fund before you begin to invest.
Contribute to your pension
For many of us, our retirement might still seem like a lifetime away. But making regular monthly contributions from an early age can make a huge difference to your pension pot when the time to retire eventually comes.
Many people of working age will benefit from a workplace pension, a way of saving for your retirement that’s arranged by employers. For all but the highest earners, you don’t pay tax on money invested in your workplace pension, meaning that your money will go further. Your employer will invest the money for you through the workplace pension – you just have to tell them how much you want to contribute. You won’t be able to access this money until you are 55, but these benefits make pensions ideal for investing longer term.
However if you’re not enrolled in a workplace scheme, it’s important to think about how you will fund your retirement. If you are paying directly into a private pension scheme then it’s important to maintain regular monthly contributions. Missing out on one monthly payment here and there can easily become a habit – one that might be costly when you retire. So be sure to contribute to your pension on a regular monthly basis before you make any other investments.
Now are you ready to invest?
If your day-to-day finances are in order, you’re already saving regularly into a pension and are well prepared for any financial emergencies, you could be ready to start investing.
If you feel ready to begin investing then it’s sensible to start with mainstream investments, such as funds that invest in a range of companies on your behalf. While stock markets can of course go down as well as up, and returns are not guaranteed, holding funds that invest in some of the world’s biggest, well-established companies can provide you with income, as well as some element of security.
Once you are ready to begin investing, there are 2 main approaches to the timing:
1. Saving at regular intervals
By committing to save regularly, perhaps every month immediately after pay day, you gradually build up your investment total over time. Sometimes this can bring another benefit if the price of the investment you’re buying changes a lot from month to month.
If, for example, you’re buying shares, making regular monthly purchases can help to smooth out market returns because your fixed monthly investment effectively buys more during months when the price has dipped. Conversely, it buys less when the price is more expensive.
2. Investing a one-off lump sum
Another approach is to commit all the money you intend to invest in one go. If you have received some money unexpectedly, perhaps from an inheritance or a work bonus, then investing it all at once can be more convenient.
If you’re confident that the market you’re buying into is set for a significant near-term rise and don’t want to miss out on possible early gains then making a lump-sum investment gets you fully invested immediately.
Over time, it can make sense to reduce your reliance on any one type of investment by spreading your money across different markets. Splitting your risk across different kinds of assets can help to smooth out your investment returns over the long term.
Why diversification makes sense
Staying invested, rather than frequently moving in and out of markets, can also help to keep costs low and enhance long-term returns from a diversified mix of investments.
Spreading your risk can help to build long-term gains
With diversification in mind, don’t be tempted to jump straight to high-risk investments until you’ve been investing for a while, and also fully understand both the risks and opportunities.
Although high-risk investments can offer the potential of higher returns, if things go wrong the risk of you losing some, or even all, of your money is very real.
For more experienced investors who better understand the balance of risk and returns, higher-risk investments may have a role to play. But even for seasoned investors, it’s sensible to only consider putting at most 10% of your assets in high-risk investments.
Original link to this article
Financial Conduct Authority