How investing works
Five tips for new investors
By Michael Trudeau
Article 2 of 4
Five tips for new investors
If you invest your money, you have much greater potential for growth than you do if you leave your money in a savings account.
In the current economic climate, with interest rates still around record lows, you could be losing out by keeping your money in a savings account because inflation will eat into your returns, meaning you could lose money in real terms.
Investing in the markets could enable you to achieve an inflation-beating return and help you reach your long term financial goals. But it’s important to understand that when you invest, you are putting your money at risk.
The greater the risk you take with your money, the greater the potential for growth.
But with this comes an increased chance of losing your money. Before even considering investing your money, you need to be comfortable with the risks involved.
No investment is risk-free, and if you simply can’t accept that there are no guarantees and that you could, potentially, lose some of your money, you are not ready to become an investor.
When making financial decisions, it’s important to consider the five steps below before you do anything with your money.
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1. What are your financial goals?
Set clear goals. Are you just looking to grow your money? Or are you looking for a regular income? Is there a set amount that you want your money to grow by or a minimum income that you need?
Having set goals will help you to decide how much risk you need to take to achieve what you want. You may not have a particular reason for investing, but try to ascertain exactly what you want your money to do.
2. What’s your time frame?
Once you know what your goals are, work out how long you need to achieve them. This will give you a clear idea of the kind of rates of return that you’ll need from your investments and whether or not your goals are realistic.
Factors such as your age and health are important to consider. If you have short-term goals (less than five years) you should stick to cash savings because, if your investments fall in value, you might not have time to recover your losses before you need the money.
Medium (five to 10 years) and long-term goals (10 years or more) are appropriate for investment, but some investments become less appropriate the older you get. You have less time for your money to recover if it falls in value and, if you’re retired, your capacity to earn is diminished.
3. Understand your attitude to risk
Understanding the risks you'll encounter when investing and deciding how much risk you are willing to take is fundamental. You might have a long time frame, and plenty of cash to fall back on, but if you don't think you would sleep at night if the markets became volatile, a high risk approach probably isn't for you.
Read our guide to understanding investment risk to learn more about your attitude to risk.
4. How much can you afford to invest?
Be realistic about how much you can afford to invest. Assess all of your liabilities, such as debts, insurance premiums, pension contributions, savings and living costs, to see how much spare cash you have to invest.
Investing works best when you can take a long term view, so stay in cash if you think you might need the money in the next five years.
5. Seek financial advice
Many investors make their own decisions, without advice. But DIY requires time, knowledge and confidence.
If you take financial advice, you'll be able to talk through all the points raised above and ensure that your investments are tailored exactly to your needs. Read our guide to choosing a financial adviser for the best ways to get investment advice.
- Last updated: August 2016
- Updated by: Michael Trudeau