How to Start Investing

Investing is a powerful way to build wealth over time, but taking those first steps can feel overwhelming, especially if you’re new to the financial landscape. With so many options, risks, and strategies to consider, it’s essential to have a clear path forward. Here’s a comprehensive guide to help you start investing in the UK, covering everything from setting financial goals to choosing investment products and managing risk.

Step 1: Set Your Financial Goals

Before diving into investments, understand why you’re investing in the first place. Clearly defined goals will help shape your investment strategy, risk tolerance, and time horizon. Common goals could include:

1. Building Wealth – Growing your wealth for long-term goals, such as retirement.
2. Emergency Fund – Ensuring you have a safety net for unexpected expenses.
3. Property Purchase – Saving for a deposit or creating a portfolio in buy-to-let properties.
4. Education – Setting aside funds for children’s or grandchildren’s future education.

Step 2: Understand Key Investment Principles

To make informed choices, it’s helpful to understand some key investment principles that underpin successful investing:

• Compounding: This is when you earn returns on both your original investment and the returns that it generates over time, creating a snowball effect.
• Diversification: By spreading your money across different types of assets, you reduce the risk of significant losses.
• Risk Tolerance: This refers to your ability and willingness to endure market fluctuations. Knowing your risk tolerance will help you choose appropriate investments.
• Time Horizon: This is how long you’re willing to invest before you need to access your money. Longer time horizons generally allow you to take on more risk.

Step 3: Choose the Right Investment Accounts

For UK investors, tax-efficient accounts are the best places to start. Two of the most popular options are:

1. Individual Savings Account (ISA): ISAs are tax-free accounts with an annual allowance. You can invest up to £20,000 in a stocks and shares ISA for the 2024/25 tax year, and all gains and dividends within the ISA are tax-free.
2. Personal Pension (including SIPPs): If you’re saving for retirement, a Personal Pension offers tax relief on contributions. For basic-rate taxpayers, this means you get an extra 20% boost, with additional relief available at higher tax brackets. You could put in up to £60,000 (gross) per tax year into a pension.

Additionally, some investors might consider Lifetime ISAs (LISAs), which provide a government bonus of 25% on contributions, up to a maximum of £4,000 per year, intended for first-time home purchases or retirement.

If you use up all of your tax-free allowances, you can also open a General Investment Account (GIA). You would not have the tax efficiencies as with ISAs or pensions and you would need to pay tax on interest or dividends and Capital Gains Tax on any gains.

You can choose one of the many specialist platforms to open your investment accounts. Use your internet browser to search for a comparison site that will let you decide which one is right for you.

Step 4: Choose Your Investments

Once you’ve chosen your account, it’s time to select your investments. Here are some common investment types available in the UK:

1. Stocks (Equities)

• Investing in individual stocks gives you ownership in a company, with the potential for growth and dividends. However, stocks are volatile, so consider them primarily for long-term goals.
• UK vs. Global Stocks: Some investors like to diversify between UK and international markets to spread risk.

2. Bonds

• Bonds are essentially loans to governments or companies and are generally more stable than stocks. UK government bonds (gilts) are popular for risk-averse investors or those nearing retirement.

3. Mutual Funds, Unit Trusts and ETFs

• Mutual Funds pool investors’ money to buy a diversified portfolio of stocks, bonds, or other assets, professionally managed by fund managers.
• Unit Trusts operate similarly to mutual funds but are structured differently in terms of fund management and pricing. Unit Trusts are “open-ended,” meaning they can issue or redeem units as investors buy or sell, making it easy to enter and exit. Investors own units in a diverse portfolio, often focused on a specific sector or region.
• Exchange-Traded Funds (ETFs) offer similar diversification but trade like individual stocks on an exchange. They often have lower fees than mutual funds and can target specific sectors or countries.

5. Property Funds or REITs (Real Estate Investment Trusts)

• Property can be an attractive investment, but direct property purchases can be capital-intensive and challenging to manage. A REIT provides exposure to property through a fund, often focusing on commercial or residential real estate.

6. Alternative Investments

• These include commodities (like gold), cryptocurrencies, and collectables. While alternatives can provide diversification, they also tend to be more volatile and are less regulated.

Step 5: Manage Risk with Diversification

Diversification is a key strategy to help manage investment risk. This means spreading your investments across different asset classes (stocks, bonds, property) and regions (UK, US, Europe, emerging markets) so that if one area performs poorly, it’s offset by others that may perform well. Many platforms offer ready-made diversified portfolios, or you can achieve this by choosing a mix of funds and ETFs that align with your goals. You can read about risk in our blog post here.

Step 6: Start Small and Stay Consistent

Starting small is a great way to ease into investing without feeling overwhelmed. Many platforms allow you to start investing with as little as £50 per month. Regularly investing a set amount, a strategy known as pound-cost averaging, helps smooth out the effects of market volatility over time, as you buy more units when prices are low and fewer when prices are high.

Step 7: Keep an Eye on Fees

Investment fees can eat into your returns over time, so it’s important to keep them in check. Different products and providers have varying fee structures, such as:

• Platform Fees: Charged by your investment platform, often a percentage of your holdings, a flat fee, or both.
• Fund Management Fees (OMC): Some funds charge ongoing management fees, which can vary from as low as 0.1% for some index funds to 1% or more for actively managed funds.
• Transaction fees: notice any transaction fees, as they can be added by funds and/or platforms at the time of buy and sell.

Opting for low-cost funds, especially passive index funds and ETFs, can be a way to reduce costs.

Step 8: Monitor Your Portfolio

Regularly reviewing your portfolio ensures that your investments stay aligned with your goals and risk tolerance. However, avoid the temptation to check daily; long-term investing is about patience. A quarterly or annual review is generally sufficient unless there’s a significant change in your circumstances.

During these reviews, consider:

• Rebalancing: If certain investments have grown faster than others, your portfolio might become more aggressive or conservative than you intended. Rebalancing helps maintain your desired asset allocation.
• Progress Toward Goals: Check if your investments are on track to meet your objectives. Adjusting contributions or asset allocation may be necessary if your circumstances change.

Step 9: Avoid Common Pitfalls

New investors often face pitfalls that can hinder long-term success. Be mindful to avoid:

• Trying to Time the Market: Attempting to buy and sell based on market conditions is risky and challenging even for seasoned investors.
• Emotional Decisions: Market downturns can be distressing, but selling during a dip can lock in losses. Stay focused on your long-term goals.
• Overtrading: Excessive buying and selling can result in unnecessary fees and tax liabilities.

Step 10: Seek Professional Advice If Needed

Starting your investment journey independently is possible, but if you’re unsure about your strategy, picking a platform or need help aligning your investments with your financial goals, consider speaking with a qualified financial adviser. A UK financial planner can help tailor a plan that suits your needs, offering guidance on account types, product selection, and portfolio management.

Final Thoughts

Investing is a journey, and starting with clear goals, diversified investments, and a disciplined approach can help you achieve long-term financial success. By making small, consistent investments and adjusting as needed, you can make your money work harder for you, setting you on the path toward financial freedom. Remember, every journey begins with a single step — and for your financial future, today is a great day to start!