There’s no denying that the world of investing can be very confusing for first timers – we blame the financial jargon! Luckily, we’re here to help, and we’ve got some investment tips to make things a bit easier for you and help you take control of your journey.
Consider investing as soon as you can
If you haven’t taken the plunge yet, what are you waiting for? Assuming you're in the position to and you’re comfortable taking some risk with your money, now could be a good time to start investing. By delaying your investment journey, you could be missing out on some positive growth – not ideal if you’re looking to maximise your potential profits. If you want to make the most of your investment journey, it could be worth letting your FOMO take over and urge you to invest. The earlier you start, the sooner your money could grow, so consider joining the investment world as soon as you can.
Invest as much or as little as you want
It’s often assumed that investing is exclusively reserved for men wearing grey suits. It may have been true some years ago, but fortunately things have changed, and investing is now something that everybody can do. Thanks to online investment platforms, like Wealthify, you can invest as much or as little as you want, whether it’s £1 or £100,000. And, in case you’re wondering, it’s possible to build a decent nest egg starting with just little bit of money, as long as you make regular contributions to your investment plan and stick with it for a number of years. For instance, if you invest £30 a month for 25 years, you could end up with about £14,488 – not a small sum1!
Think about what you want to invest in
If you’re just starting your investment journey, you’ll quickly find out that there’s a number of different investments available to build your portfolio, and it’s important to think about what you’d like to invest in. What investment types would you want to include in your portfolio? The answer will mainly depend on your attitude to risk. If you’re cautious and want to minimise potential losses, then safer investments, such as government and corporate bonds, could be an option for you since their value isn’t normally subject to large fluctuations. On the other hand, if you’re comfortable with market movement and like taking risk, then you could consider higher risk investments, like shares? And if you’re somewhere in the middle, you could even combine both, bonds and shares, in your portfolio - it really is up to you.
At Wealthify, we offer five investment styles based on your risk level – you can be cautious, adventurous, or somewhere in between. You choose the style that suits you, and our investment team will build you an investment plan with the right mix of investments.
Consider diversifying your portfolio
Regardless of your investment style, it’s always a good idea to try and mitigate your risk. If you want to limit potential losses, you could diversify your portfolio by spreading your money across investment types and regions. Think about it. If you invest all your money in one or two companies, you could be in for a nasty shock should these companies struggle. Now, say you buy a number of investments, including different types (e.g. shares, bonds, property), and invest in different financial markets, the likelihood of losing all your money will decrease.
Have a look at ISAs
Living in the UK comes with many advantages, and we’re not talking about the weather obviously! No, we’re talking about tax. Usually, when you invest, you typically need to pay tax on the profits you make, but since 1999, it’s been possible to stop the taxman from dipping into your investment pot. With a Stocks and Shares ISA, you can invest your money in the stock markets and you don’t need to pay UK tax on any gains you make, meaning you get to keep more of your money at the end! Every tax year, you can put up to £20,000 (subject to change) in your Stocks and Shares ISA – this is your ISA allowance and you’ve got until midnight on the 5th April to use it. And since it’s not every day that you get presents from the government, it could be worth considering your allowance before the deadline passes.
Start thinking about your pension
It’s never too early or too late to think about your pension. If you’re in your 20s, saving for retirement may not be your priority, and we don’t blame you! But it could be a good idea to start planning ahead and get your finances in shape so you can take control of your retirement sooner rather than later. If you’re in your 30s or 40s, now could be a good time to check how much you’ve got saved in your state pension and workplace pensions. Then start asking yourself some important questions: Will it be enough to retire? If not, is there any way you could maximise your retirement income?
If you’re looking to boost your retirement pot, opening a personal pension, also known as Self-Invested Personal Pensions (SIPPs) could help. With a personal pension, you get to save as much as you want for your retirement and you don’t need to pay UK tax on any profits you make. And that’s not all! You will also receive 20% tax-relief from the government – this is to compensate for the income tax you’ve already paid. In concrete terms, if you’re basic rate taxpayer and earn £1,000, you’ll typically have to pay 20% tax on your earnings, which is £200. Let’s imagine you put what you’ve got left (£800) in your personal pension. You’ll get back £200 as tax relief and your pension pot will be worth £1,000. Now, if you do the maths, £200 is 25% of £800, meaning you effectively receive a 25% top-up every time you pay into your pension – yes, this can be confusing, but here it’s working at your advantage, so what’s not to love? One thing to keep in mind is that the amount you’ll get tax relief on is limited to £40,000, or 100% of your earnings (whichever is lower) – this is your annual allowance and it includes the combined contributions made by you and the government. Another thing to note is that your pension money will be locked away until you turn 55 You won’t be able to withdraw any funds before your 55th birthday, so make sure you’re comfortable leaving your money invested over a number of years. Once you turn 55, you’ll be able to take 25% of your pension pot tax-free – another reward for your patience!
Go ethical if you want to
Who said you can’t make a positive difference when investing? If you want to do your bit for the future, you can! In fact, there are many ways to invest ethically. You can do it yourself and pick your own sustainable investments, but if it sounds like too much work, you can also choose to open an ethical plan that’s managed by experts on your behalf.
At Wealthify, we offer Ethical Plans and make sure your money is invested in companies that are committed to having a positive impact on the environment and society. We use ethical funds (hampers full of sustainable investments) that are actively managed. In other words, people who manage these funds, examine companies’ activities and policies and invest in organisations that either have excellent ethical standards or work very hard to improve their practices. And each company included in the fund is monitored on a regular basis, that way if an organisation lets its standard slip, it will be removed from the fund.
Starting an Ethical Plan is easy. All you need to do is choose how much to invest, select your risk level, and toggle the ethical switch ‘on’, then we’ll do the rest, from picking your ethical funds to managing your Plan on an ongoing basis.
Try to remain calm when markets fall
Financial markets are a bit like roller coasters, they have ups and downs, and as an investor, you need to accept that the ride will likely be bumpy. Of course, seeing markets go down can be stressful, there’s no denying it, but when this happens, it’s important to remain calm. If you sell your investments, you’ll be making your losses real. If you stay calm and resist the urge to sell, your losses will remain hypothetical – it’ll only be a number on your dashboard, so if markets bounce back, you could see the value of your investments go up and end up making a gain over the long-term. If you try to time the market, however, and get out of the game when markets are falling, you could still miss out on the good days and the potential rebound.
Let’s take an example to illustrate this. If you had invested £10,000 in the FTSE 100 at the start of 2000 and remained invested until the end of 2019, you could have ended up with about £21,255, meaning your money could have grown on average by 5.4% on an annual basis (including reinvested dividends) – note that this period includes the Global Financial Crisis of 2008, one of the worst market crashes in history. But if you had tried to time the market and taken your money out during the bad days or before what you thought would be the dip (when markets hit their lowest point during a downturn). You would have missed some of the best days and your gains could have been much lower, and depending on how long you were out of the market, you could have even made your losses real2.
Markets are unpredictable and it’s impossible to guess when the best time to invest is. The truth is that most investors who try to time the market to maximise their profits end up failing. So, unless you have a crystal ball or some cool superpowers (that you should probably keep secret), try and remain focused on your long-term goals.
Think about the long-term
Let’s be honest, most of us don’t like to wait. In a world where you can get next-day delivery or watch TV on demand, patience is becoming rarer and rarer. And yet, if you’re serious about investing and want to maximise your potential profits, you’ll need to be patient and think about the long-term. According to many studies, the longer you remain invested, the more likely you are to make a profit. For instance, if you invest £10,000 in Stocks and Shares ISA and remain invested 15 years, you could end up with £16,3333. But, if you manage to wait an extra 10 years, you could get around £23,766 – that’s an extra £7,4334.
Get help if you need to
Investing can feel daunting, but it doesn’t have to be. Thanks to digital investment platforms, like Wealthify, you can become an investor with just a few taps. Simply choose the type of plan you’d like to open, how much you want to invest, the risk level that suits you, and we’ll do the rest, from picking your investments, to adjusting your plan, when needed, to keep it on track. Investing has never been easier!
1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £10,809. If markets perform better, your return could be £20,307. Values correct as of 14/04/20.
2: Data from Bloomberg
3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £10,692. If markets perform better, your return could be £24,318. Values correct as of 14/04/20.
4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £13,949. If markets perform better, your return could be £41,966. Values correct as of 14/04/20.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.