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2 Jan 2022

Seven tips for investing for the first time in 2022

Here's what you need to know to start investing safely and profitably

Want to start investing in 2022? We explain what you need to know to get better returns and understand and manage the risks involved.

Investing can be a great way to build your wealth. However, it's not something to dive into without doing your research first. The gains from investing can be greater than saving because you're taking a risk with your money - meaning there's a chance your investments will go down as well as up.

Here, what you need to know to get started, followed by seven tips on how to grow your investments without taking on too much risk.

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How much money do you have to invest?

You don't need to be wealthy to invest: some investment platforms allow you to start from just £1.

However, before investing, ask yourself these two questions:

  1. Do you have a rainy day fund? This is to cover unexpected costs like a broken phone or boiler or a sudden loss of income. You should have enough saved to cover three to six months of living costs.
  2. Do you have any high-interest debt? Make sure you pay off credit card debt and personal loans, as these may cost more than you could realistically make from investments

Remember, investing should be for the long-term - so whatever cash you put in, you need to be happy to be part with for at least five years. You should also be prepared to get back less than you put in.

You don't need to invest a lump sum. In fact, it's usually safer to start by drip-feeding in a small amount every month.

What should you invest in?

You can invest in a range of assets such as stocks and shares, bonds, funds, investment trusts and commodities like gold.

Each type of investment has its own level of risk. The higher the risk, the higher the potential returns - and the potential losses. Always work out whether the investment is appropriate to the level of risk you're prepared to take and our ultimate investment goal.

'Treat an investment like a purchase,' advises Andy Russell, CEO of investment service Wealthify. 'If you were buying a £1,000 car, you'd do the research first.'

Funds and trusts may be more suitable for beginners, as you get an experienced fund manager picking stocks on your behalf. Even for more experienced investors, funds and trusts offer a considerable time saving.

Which platform should you use?

You can buy and hold investments online through an investment platform.

There are a plenty to choose from, and which one is right for you will depend on the level of research and information you want and whether they offer the products you want to invest in.

Some platforms function as 'fund supermarkets', with a huge range of investment options, with advice and news to help you pick.

Other platforms, known as 'do-it-for-me' platforms, ask you to complete a questionnaire about your goals and attitude to risk, before recommending you a portfolio of investments.

Platform fees can also differ substantially and make a big dent in your returns. You can find out what each platform offers and charges in our investment platform reviews.

  • Find out more: we've analysed the best investment platforms for 2021, which could help you make a decision on where to put your money.

7 tips for investment success

To get better returns and help keep your money safe, follow our investing tips:

1. Decide on a goal

Your investment goal might be buying a house or saving for retirement. It's important you have one in mind so you can structure your investments appropriately.

'If you've got a short-term goal, you need to be thinking about much lower-risk investments - you can't afford a lot of volatility,' said James Norton, head of financial planners at investment platform Vanguard. 'Someone saving long-term for retirement can tolerate a much higher level of risk because they can afford to ride out the market volatility.'

2. Make use of tax wrappers

With tax wrappers, you can shield your investments from taxes that could eat into your returns.

The most common tax wrappers are pensions and Individual Savings Accounts (Isas).

You can save up to £20,000 in an Isa each year tax-free. There are several different types of Isa - stocks & Shares Isas, cash Isas, lifetime Isas and junior Isas.

With a person pension, or a self-invested personal pension (SIPP), you get tax relief on contributions up to 100% of your annual salary (to a maximum of £40,000 per tax year).

3. Have realistic expectations

A survey of over 1,000 people carried out by pension and investment provider Aegon found that many investors - particularly young investors - have unrealistic expectations of their investment returns, with 19% of 18-34-year-olds saying annual returns above 10% were reasonable.

But plenty of investments will deliver a rate of return below this. While it's good to aim high, be careful that your spending isn't reliant on you achieving a particularly high level of income from your investments.

4. Watch out for charges

You'll have to pay charges to invest. The most common is the fee you pay the platform, but there may also be management fees, trading fees and performance fees.

Over time, these can seriously eat into your profits.

How charges affect a £50,000 investment*

ChargesEarnings after 10 yearsEarnings after 20 yearsEarnings after 30 years
0%£81,445£132,665£216,097
0.2%£79,905£127,701£204,084
0.4%£78,395£122,915£192,717
1%£74,012£109,556£162,170

*assuming 5% average annual growth

See how, over a 10-year timeframe, a charge of 1% - which may not sound like a lot - can eat up over £7,000 in returns.

Remember that higher charges for a platform or fund don't necessarily make for better returns.

5. Beware of scams and hot trends

Investing for the first time can be exciting - but don't get swept up in the excitement going after 'flavour of the month' stocks.

Take cryptocurrencies like Bitcoin. While increasingly popular, they're also extremely volatile. The Bank of England warned in December 2021 that Bitcoin could become 'worthless' and investors in the digital currency should be prepared to lose all their money.

The cryptocurrency market itself is also rife with scams. Data from Action Fraud shows that a stunning £146,222,332 was lost to cryptocurrency fraud between January and October 2021.

No investment is without risk, so if you see an advert claiming an investment is guaranteed to deliver high returns, steer clear.As a general rule: if it looks too good to be true, it probably is.

6. Diversify

Diversification - not putting all your eggs in one basket - is key to a successful investment strategy.

'If you put money in a single stock, you're exposing yourself to company-specific issues which could cause the stock's price to plummet,' said Andy Russell. 'With a diversified portfolio, you're spreading out your risk.'

One of the easiest and cheapest way to diversify is by buying a fund. Funds contain dozens or even hundreds of holdings, reducing the impact of a few poor performers on your overall portfolio.

Another way to diversify your portfolio is by reducing your exposure to one specific sector or geographic location. 'Home bias' is common in investors' portfolios. But if you invest mostly in the UK stock market - which accounts for less than 5% of global market indices - you're missing out on a wide range of other high-performing markets, like the US tech sector.

7. Don't panic

Markets are volatile, and investing in them can be nerve-wracking. When the market falls, most investors' gut instinct is to sell.

But dumping your investments during a market downturn - or, 'panic selling' - means you lose out on the gains when the market recovers.

Analysis by Quilter found that someone with £100,000 invested at the beginning of 2020 would have seen their investment plummet to £78,645 when the coronavirus outbreak sent markets crashing in March.

But if they'd held on until May 2020, their investment would have recovered to £98,159.

'If you're investing for ten years, you need to learn to tune out the noise,' said Andy Russell. 'Don't get spooked by a short-term fall in the value of your investments - ride out the market volatility.'

New to investing? Check out our guides

Investing your money for the first time is a big step.

We've got lots of guides that can help you on your journey:

If you can afford to, it could be worth getting a financial adviser to suggest investments and draw up a holistic plan for all of your finances.