11 Jun 2019

Should I start investing my money?

Investing is often seen as an activity only for the uber-wealthy. Or for experts who spend their days poring over the FT, looking for the next hot stock to buy and sell.

But investing has changed a lot in recent years. Thanks to technology, you can start investing with as little as £1 via apps like Moneybox and place your cash into a varied portfolio of investments. The apps also let you to log in any time and see what you’re invested in, how much return you’re making, and a clear break-down of fees.

To start investing, you need to have some extra cash which you can afford to set aside. And it’s worth paying off any high-interest debt and making sure you have some savings you can access easily if you need to first.

But, depending on your circumstances, investing has the potential to help you get more out of your money than leaving it in a savings account. You just need to remember there are risks.

Investment beats inflation

With inflation currently at 2.1% and many UK savings accounts and cash ISAs offering an interest rate of less than 1.5%, there’s a chance the value of your savings could go down over the long term.

On the other hand, a diversified portfolio in stocks and bonds could help you beat inflation over the long term. Plus, with rising property prices, fewer pension benefits and stagnant wages, it’s worth making your money work as hard as it can.

Matt Richardson, a 30-year-old playground equipment designer and manufacturer, can relate. After selling his house and moving in with his partner, he invested about £20,000 in a stocks and shares ISA on investment platform Hargreaves Lansdown.

"I'm expecting a conservative return of around 5% with my investments."

“The reason I’m investing in various funds is that, in theory, they’ll offer a much higher rate of return than a cash ISA,” he says. “I can get around 1.55% if I’m tying the money up for a year in an ISA, whereas I’m expecting a conservative return of around 5% with my investments.”

Make sure you have some savings in cash first

Before you jump in, there are a few things to consider if you’re a first-time investor.

First, make sure you have an emergency fund with enough cash to cover three to six months’ worth of expenses, and pay off any high-interest debt first.

“Ideally, you want to be able to invest your money for a minimum of five years, and preferably longer. So the money you allocate to investments needs to be money you can do without for at least five years,” explains Emma Maslin, a blogger and author, and founder of The Money Whisperer.

Matt also follows this advice. “I have about 80% of my lump sum in a cash ISA purely for the safety factor that it’s a guaranteed return. Even if it’s a very small amount.” He then puts 15% of his income into his stocks and shares ISA every month.

So, if you’re wanting to buy a house in the near future, for example, it wouldn’t make sense to lock up all of your money in investments.

"You want to be able to invest your money for a minimum of five years, and preferably longer."

Only invest in line with your appetite for risk

Depending on your situation, how much risk you’re willing to take on will vary, depending on things like your age, your income, how secure your job is, and your other financial commitments.

The general rule is that the more time you have to invest, the more risk you can afford to take.

If you have lots of time before you need the money and invest in a riskier fund, you can leave your money invested while the markets go through their ups and downs, letting the amount you’ve invested grow gradually over time. But if you’re nearing retirement and need the money sooner, the opposite is generally true, and you’re better off investing in a low-risk fund.

"I still feel like I have plenty of time to make up for any losses if things go a bit wrong."

Alex Clabburn, 36, earns £40,000 working as a commissioning editor in London. He has two young children and started investing five years ago, once he’d cleared his student debt.

He invests in renewable energy companies and has invested through peer-to-peer platforms, which let people invest directly in different companies they’re interested in or think they’ll make a return from. These platforms are arguably riskier compared to professionally managed investment funds, because you typically invest in smaller and less stable companies.

“Having kids made me rethink my riskier strategy a bit,” he says. “But I still feel like I have plenty of time to make up for any losses if things go a bit wrong. So I’ve broadly stayed quite aggressive in my approach.”

Get professionals to pick for you

Most of the time, it might suit you better to pay a professional to pick a portfolio for you. And these days you can do that through apps like Moneybox, Nutmeg, Evestor and Moneyfarm.

There are more than a dozen to choose from, and they all work in a similar way. The main differences are fees (many of the apps have a fee calculator so you can see exactly how much it will cost per year) and the smallest amount you can start off with (£1 for Moneybox, and £100 if you open a Lifetime ISA with Nutmeg, for example.)

“You need to be aware of fees associated with investing and consider how these can eat into your returns,” advises Emma. “When you only invest a small amount, you could find that your fees outweigh any gains – so always check your fees very carefully.”

Amy, 35, uses Moneyfarm. She earns £42,000 in her marketing role in Birmingham. She has just under £6,000 in a stocks and shares ISA, and tops it up with £100 a month.

"I've only got a small amount invested, because I spent my 20s paying off my overdraft, credit and student debt. I now feel much more in control."

“Apart from a mega dip in December, things are going well. I’m pleased with the performance although it’s really early days,” she said. “I’ve only got a small amount invested, because I spent my 20s paying off my overdraft, credit and student debt. I now feel much more in control.”

“There are a few other apps I like the sound of – and will aim to start another ISA up next year,” she said. “I don’t get bothered about the market going up and down – I get bothered that I’m too late – my mates have much more saved than I do.”

Make a positive difference with ethical investments

Many investors are more focused on how they want to invest, as well as how much they want to make. One way to do this is via ethical investments – for example, stripping out controversial sectors like fossil fuels and cluster munitions, or focusing on companies that have a small carbon footprint.

Alex only owns ethical investments, including a stocks and shares ISA from Triodos Bank and using crowdfunding platforms like Lendahand, where he said he had a 5-6% return for funding off-grid solar projects around Africa.

“I’ve pretty much taught myself as I went. But I built things very slowly until I felt I really understood what I was looking at before putting any money in,” he says. “I’ve also found the ethical angle to be key for me. It makes me feel like I’m making a positive contribution, sending money where it’s really needed whilst still getting a return.

"I’ve pretty much taught myself as I went."

“It also helped narrow the field down, which made it much easier to get my head round the world of investing.” Alex used to top up his investments once a year, but now he’s more focused on paying off his mortgage. He insists that the costs of ethical investments aren’t higher than other investments - the only difference is there’s a bit less to choose from and, in his experience, the returns have been a bit lower.

“I’m very happy with how mine have performed though and can’t ever see myself investing without feeling that the money is doing something positive,” he says.

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