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Are you ready to invest?

Investing your money for the first time is a big step. In this guide, our experts will help you decide whether it's right for you.

In this article
Why do you want to invest? Are you in debt? Have you got emergency savings? Do you understand the risk you're taking on? Are any investments 'risk-free'?
Should you buy cryptocurrency? Should you take financial advice? How do you start investing? Should you invest a lump sum or regular savings? Beware of investment scams

Low interest rates on cash savings in recent years have meant that many savers are looking for a better return.

Investing means taking risks with your money. This is not necessarily a bad thing – more risk could mean better returns  – but if you're going to invest you need to be prepared for the fact that you could lose some, or even all, of your savings.

Before you do invest, it's crucial to assess your finances and make sure that you have the necessary safeguards in place. 

In this short video, Which? editor (and previously Which? Money editor) Harry Rose suggests four things to consider as a starting point. 

Why do you want to invest?

Your financial goals should determine whether you invest or keep your money in cash savings.

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?

In general, you should be prepared to part with your money for at least five years, to give your investments a better chance of riding out dips in the market. This is particularly important if you're close to retirement.

Having set goals will help you to decide how much risk you need to take to achieve what you want.

Here are some typical examples of financial goals and investment considerations:

Are you in debt?

Make sure your debts are under control. The cost of your debt – in interest payments – is likely to outweigh the returns you receive from investments.

The exception is mortgages and certain types of student debt, if the interest rates are low.

Focus on reducing debt to levels that are comfortable to manage or, ideally, pay off all debt before investing.

Have you got emergency savings?

Have you got spare cash to fall back on? Before risking your money, you need some core savings – an emergency fund to cover unforeseen events. 

The generally accepted rule is to have at least three months' salary in savings before you invest. Also think about upcoming costs, as needing to withdraw money quickly from investments could mean you withdraw at a loss.

Pausing workplace pension contributions in order to invest is unlikely to prove profitable, because you'd miss out on employer contributions and tax breaks.

Get protected

Make sure you are protected against the possibility that you have to stop working for an extended period of time. Check your sick-pay scheme at work to see how long you would be covered for and consider taking out income protection insurance if you are self-employed. 

Other insurance, such as critical illness cover or life insurance, could also be an option if you have a mortgage or dependents, although this can be expensive.

Do you understand the risk you're taking on?

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. 

You can't assess risk if you don't understand what you're investing in. For instance, do you really understand the challenges facing commercial property?

Be honest and if at all in doubt consider more straightforward (and more regulated) equities and bonds investments.

Are any investments 'risk-free'?

Some investments are deemed less risky than others, such as corporate and government bonds

However, you can't eliminate risk completely. For example with corporate bonds, the bond issuer could go bust. In this case it wouldn't be able to continue paying interest or to repay the loan when it's due, so the bond becomes worthless. 

Second, the price of bonds rises or falls according to demand and supply – so unless you hold your bond until it’s due for repayment, you can’t be sure what it will be worth at any given moment. If you want to cash in the bond by selling it, you may have to accept a loss. In practice, the riskiness of a bond depends largely on the creditworthiness of the issuer.

Government bonds issued by countries with developed economies – UK government bonds are known as gilts – are regarded as a safer bet. Such governments are highly unlikely to default on interest or capital repayments; the value of their bonds also tends to move up and down in a narrower range.

Generally, the yields on bonds can be quite low. So although they're technically 'safer' assets, in investing, lower risk tends to mean lower returns. 

If you’re looking to increase your potential return, you will almost always have to accept additional element of risk. The investments that have typically produced the best returns over time have also tended to be the ones that have generated the largest ups and downs along the way, such as equities. This is why it's really important to have a diversified portfolio, with a mix of different investments that makes sense for your attitude to risk.

Should you buy cryptocurrency?

Digital currencies such as bitcoin – and there are many others – enable you to transfer money around the world without having to worry about exchange rates. It’s underpinned by computer code, not by a guarantee of value from a financial institution such as a central bank like the Bank of England.

There have been some nasty bitcoin crashes in previous years. For example, in 2018, the bitcoin price fell by more than 70% following a steep climb during the previous year. An investment that can register such enormous losses in such a shorts pace of time means it can be an extremely risky route to go down.

Also, bear in mind that cryptocurrencies are not regulated by the Financial Conduct Authority, so you will have little protection if something goes wrong. 

Should you take 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 long term needs. 

How do you start investing?

If you feel like you're ready to invest, take a look at our investment guides which includes explanations of how investing works, and the different options available to you. 

Investing within a stocks and shares Isa, junior Isa or innovative finance Isa means you won't have to pay tax on any profits you make.

Online investment platforms (also known as fund supermarkets) offer Isas and an easy and cheap way to buy and sell investments. Find our Which? Recommended Providers here.

Your choice of tax wrapper and platform is just the beginning. The pyramid below should give you a good idea of what matters most when investing.  

Should you invest a lump sum or regular savings?

Regular savings offers the opportunity to make market fluctuations work in your favour. The strategy involved is known as ‘pound cost averaging.’

Pound cost averaging describes the process of regularly investing the same amount, usually on a monthly basis, to smooth out the impact of the highs and lows of the price of your chosen investment.

The effect of pound cost averaging is that you're buying assets at different prices on a regular basis, rather than buying at just one price. And while riding out the movements of the market, you could also end up better off than if you invested with a lump sum.

If you invested with a lump sum, you'd still have the same amount of money and the same number of shares. But by regularly investing, you may end up with more shares and, consequently, some capital growth, despite the share price ending up the same as when you first started investing.

However, the potential downside of pound cost averaging compared to lump sum investing is that if your investment continuously grows in value, you'll miss out on some of that growth.

 

Planning to invest in individual shares?

 

If you're planning to invest in individual shares, pound-cost averaging could prove expensive.

Many investment platforms charge you for each trade, so if you are making a purchase every month instead of larger purchases less often, you will rack up transaction charges and these could wipe out some of the gains made from drip-feeding your money.

Individual shares can be a risky way to invest as you're dependent on the fortunes of a few companies. An investment fund or investment trust spreads your money out over thousands of companies for a small cost.

Beware of investment scams

An investment scam occurs when someone offers you a fake – but often convincing – opportunity to make a profit if you hand over your money.

On the face of it, the offer can seem perfectly legitimate. But in most cases you’ll lose some or all of your money.

Another thing to watch out for is investments involving unregulated products, which aren’t covered by the rules of the Financial Conduct Authority (FCA) and tend to be much higher risk.

Unregulated investments are generally not protected in the same way as regulated savings and investments, and usually can’t be recouped through the Financial Services Compensation Scheme (FSCS).

You can check Companies House to see whether a firm is registered as a UK company and search for the names of directors – there may be information about them online.

You should also see whether the firm’s registered with the FCA, and look at its warning list to check if you’re dealing with a known scam. 

If you think you’ve been targeted by an investment scam, you should report it to the FCA Scam Smart website.

If you’ve lost money to a suspected investment fraud, you should report it to Action Fraud on 0300 123 2040 or on its website.

 

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