10 tips for becoming an investor

Michelle McGagh
Chinese businessman drawing line graph in sky
Chinese businessman drawing line graph in sky

Savers have seen thousands of pounds wiped off the value of their savings in real terms due to low interest rates so it's no surprise that more are planning to take some more risk to reap better returns.

March marks six years of the interest rate at 0.5% and it looks unlikely to go up this inflation stays low. Andrew Goodwin of Oxford Economics believes it is 'impossible' for the Bank of England to increase rates this year.

'We think that interest rates will be [at 0.5%] until this time next year and conceivably longer than that,' he said.

While low inflation is good for consumers who will see their spending power increase, it is more bad news for savers.

But before you ditch your paltry savings rates and sign up to a stocks and shares ISA, read these tips on how to invest.

1. Cover your back

In order to make money from investing you have to commit to tying your money up for a long time. This means that it isn't wise to invest without putting an emergency fund in place first.

Danny Cox, head of financial planning at Hargreaves Lansdown, said the rule of thumb for an emergency fund is three to six months of bills. This ensures that if the worst happens and you lose your job, or an emergency at home like a broken boiler can be dealt with without having to cash in your investments, which may take time and lose you money.

2. Set a goal

If you are investing or even saving, the chances are you already given that money a purpose or set a goal you are trying to achieve. Sylvia Waycot of Moneyfacts.co.uk said this was crucial when investing as it helps to stay focused when investing for the long haul.

"Make a note of why you are saving; it is a car, a kitchen or a holiday in Las Vegas?' she said.

"It is useful to remind yourself so that moments of weakness don't make you miss out on your dreams."

3. Risky business

Investing means taking risk and conventional wisdom dictates that the higher the risk, the higher the reward. But before you sign your money over to a fund manager you should decide what your tolerance for risk is. There are lots of 'risk profile' tools online that can help you determine not just the risk you need to take to achieve your goal but what amount of money you are comfortable losing if your investments go bad.

Waycot said: "Think about how comfortable you are with risking your cash. Are you prepared to lose some of your money?

4. Income or growth?

Depending on the type of investment you make you can receive income, capital growth or both. Investors need to decide what kind of investment they need depending on their goals, for example if the investment is to supplement a pension then an investment than pays income may be preferable to one that focuses on delivering growth.

Annabel Brodie-Smith of the Association of Investment Companies said: "Are you looking to take an income from your investment in the form of dividends, or for your investment to grow over time?

"Or perhaps you'd like a combination of bond. Collective investments all have different objectives and so a look at these will help."

Maike Currie, association investment director at Fidelity Personal Investing, said "choosing the best [investment] vehicle will depend on a number of factors such as when the money will be required, the ultimate purpose of the savings and how much risk you are willing to take".

5. Do your research

It might seem daunting, or just downright boring, but before you invest you need to do your research to determine what investments you want to make – such as buying shares directly or investing in funds – and who you want to help you, such as stockbrokers and fund managers.

Unfortunately there are scammers out there willing to part you from your hard-earned savings so some in-depth research should help you filter out the investments that look too good to be true.

"It is very important when choosing an investment that you conduct research," said Brodie-Smith. "Take a look at the objective, performance, costs, yield and the track record of the fund manager.

"If you are considering a closed-ended investment company, factors such as the gearing level and whether it is trading on a discount or premium, are important too. If you are in any doubt, you should speak to a financial adviser."

6. Pay for expertise

Economies are uncertain at the moment and it is understandable that would-be investors are nervous about leaving their money to the whim of the stockmarkets.

This is where experts are worth their weight in gold. If you are unsure about where to invest or what shares to buy, fund managers can take that burden away by making those decisions and trying to grow your money.

Currie said investors should "pay for quality".

"In uncertain times, people will pay for certainty and this tends to favour companies that can demonstrate sustainable growth, operational diversity and good management," she said.

7. Diversify

Diversifying your investments means spreading your risk and investing in different ways to reduce the impact if one investment falls: in short, don't put all your eggs in one basket.

"The best protection against market uncertainty is diversification," said Currie. "A stocks and shares portfolio allows you to place your eggs in several baskets by investing in a spread of investment vehicles such as bonds, equities and funds."

8. Invest regularly

Currie recommends drip-feeding money into your investment portfolio regularly rather than depositing lump sums. Not only does it get you into a good savings habit but the money will benefit from a process known as 'pound-cost averaging'.

"This means that you buy more units when prices are low and fewer when prices are high," said Currie.

"Buying at a variety of prices and spreading ongoing investments over time helps to cushion your portfolio from dips in the stockmarket. This also allows you to keep some powder dry in case there is a more significant downturn."

9. Think long-term

While savings accounts and cash ISAs are easily accessible and lend themselves to short-term goals, investing has a much longer timeframe. Investors should be prepared to lock their money away for at least five years.

Currie said: "Investing should ultimately be a long-term game and investors should not be put off by short-term market jitters."

An investor who has remained fully invested since 1994 would have earned total returns of over 300% but one who missed just the 10 best days in the market would have reduced their return by two-thirds to just over 100%.

10. Sleep tight

While investing requires some risk, it shouldn't terrify you. The aim is to invest for a long time which means you have to be happy with the risk you have taken and the investments you make, otherwise you will throw in the towel out of fear.

Waycot said: "Don't invest in anything that is going to keep you awake worrying all night!"

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