Investing for beginners – Which?

Fed up with savings accounts? Investing offers the chance of growing your money above inflation – but there are risks attached.

This is not necessarily a bad thing – more risk could mean better returns – but you should be prepared for the fact that you could lose some, or even all, of the money you invest.

Before you get started, it’s crucial to assess your finances and make sure that you have the financial security you need.

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:

• Buying property – If you’re planning to buy in the next five years, keep your savings in a cash Isa or lifetime Isa. If you’ve got more than five years, and it’s your first home, consider an investment lifetime Isa to benefit from government bonuses.
• Getting married – Cash savings are likely to be more suitable, unless you’re getting married at least five years from now.
• A child’s university fees – Investing within a junior Isa can help build your pot, plus the money will have as many as 18 years to ride out dips in the market.
• Retirement – Putting money into your pension, through additional voluntary contributions, may be the best option if you’re not close to exceeding your annual allowance.

Can you afford to invest?

Have you got spare cash to fall back on? Before risking your money, you need some emergency savings.

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.

It’s important to have your debts under control before you invest. The cost of credit card, overdraft and personal loan 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.

• Find out more: tips to pay off your debt

How do you start investing?

One way to invest is by working with a financial adviser,  who’ll be able to talk through all the points raised above and ensure that your investments are tailored exactly to your long term needs.

But, financial advice is expensive and out of reach for a lot of people. Luckily, it can be easy to manage investments yourself.

Online investment platforms (also known as fund supermarkets) are a easy and cheap way to buy and sell multiple investments in one place. You can read our reviews of the best platforms.

If you open a stocks and shares Isa, junior Isa or innovative finance Isa using an investment platform, it means you won’t have to pay tax on any profits you make.

If you feel like you’re ready to invest, take a look at our other investment guides which include explanations of what different types of investments are available and how to build the right portfolio for you.

• Find out more: how much financial advice costs 

What should you invest in?

Understanding the risks you’ll encounter when investing and deciding how much risk you are willing to take is fundamental when choosing what to invest in.

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 value of your investments dropped, 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 know enough about Bitcoin and the massive swings in its value to stake your money on it?

Be honest and if in doubt consider more straightforward (and more regulated) investments like stocks and shares or bonds.

However, you can’t eliminate risk completely. If you’re looking to increase your potential return, you will almost always have to accept additional element of risk. 

This is why it’s really important to have a mix of different investments that makes sense for your attitude to risk.

You can do this yourself, or by investing in investment funds which do this for you.