Investments differ from regular savings accounts in that they don’t offer the security of guaranteed returns that your bank provides. Investing is inherently risky, which is why it requires a long-term perspective to iron out the peaks and troughs that inevitably occur. In this article, Acumen gives you our top five investment tips for beginners when choosing investments.
Investment advice for beginners
There are a dizzying number of investments that you can make. These range from tried and tested options – such as shares, bonds, funds and the property market – to more exotic alternatives like wine, vintage cars and artwork. For the purposes of this exercise though, and to keep things simple, we’re going to focus our money investment tips on the more mainstream avenues of investment.
As we are all too aware, banks have been offering pitiful interest rates to savers. After an encouraging rise in the Bank of England (BoE) base rate to 0.75% in August 2018 after a long decade of it being kept at 0.5% or lower, the Coronavirus pandemic hit, bringing the base rate to a joint-record low of only 0.1%. The result is pitiful interest rates for savers, and with the inflation rate much higher than the banks’ savings rates, the allure of traditional savings accounts is simply not there.
All of this, of course, makes investments an attractive option. As long as you’re willing to play the long game in the pursuit of bigger returns. It must be said that despite the fact that stocks and shares have historically outperformed money in savings accounts, that isn’t to say that they will continue to do so in the future. If you can accept these risks from the outset, and we each have very different risk thresholds, then a well-researched investment plan might be worth considering.
5 investment tips for beginners
If you’re new to investing, you should consider these money investment tips for beginners when weighing up the various options available to you.
1. Make the most of the tax-free allowance
You’re entitled to an annual tax-free allowance of up to £20,000 in the current tax year on money invested through a stocks and shares ISA. You won’t pay capital gains tax on any profits earned or interest paid and withdrawals are free of tax.
2. Be aware of the different types of investments
There are several ways to invest money. We all need a pot of cash, “ a rainy day fund” to fall back on in an emergency. We accept that we won’t earn anything with cash but it’s essential for a prudent financial plan. Investment returns and “beating the battle of inflation” are dealt with elsewhere.
Fixed interest investments in Corporate Bonds and Government gilts are historically seen as lower risk than shares – however due to all the worries on the stock market over recent years, gilts have rocketed in price as investors have turned to “safer” assets and this has pushed up the price, so there could now be a danger for the unwary in investing here. Doing so without professional advice is certainly not recommended. Corporate bonds – a means by which a company can raise cash by offering a fixed return on money loaned to them- may also have greater risk attached as if the company experiences post-Covid trading difficulties, the returns are not guaranteed. Shares, or equities, give a stake in a company or commodity such as gold or minerals. These rise in value when the business or commodity performs well and fall when they don’t, which is why they present more of a risk however the potential returns for the longer term investor are also attractive and this is where we achieve “real growth “ -that is to say, growth in excess of inflation. There are also property funds of different types and they too have advantages and disadvantages ; Infrastructure investments diversification to a portfolio. There is no one, stand -alone investment that suits all investors all of the time, no “snake oil” solution to suit every investment objective or all scenarios, rather, it’s the way in which these assets are blended and in what proportion that is the key to building a successful portfolio.
3. Monitor the historic performance of funds
With a wide choice of investment funds available, it’s imperative to do your homework to find one that meets your goals and appeals to your appetite for risk. An important piece of investment advice for beginners is to monitor a fund’s historical performance, over five or seven years for example, rather than simply how it did over the last year. We sometimes refer to this as” looking through the rear view mirror” and 2020 with the unprecedented impact of Covid-19 has proved how we need to be aware of the shortcomings of this approach
4. Diversify your portfolio to spread the risk
Diversification involves dividing your lump sum across a varied portfolio of different companies, asset classes or global markets to spread the risk. As some markets fall, others will inevitably rise and help to cancel out any losses you might incur.
5. Practise pound-cost averaging
Our final investment tip for beginners is to practise “pound-cost averaging”. You can improve the likelihood of maximising your returns by regularly drip-feeding your money into a fund rather than investing a lump sum. This approach entails buying fewer shares when the market is rising and more when it’s falling in a bid to average out your cost and risk.
Bonus Investment Tip – remember that if something looks too good to be true, it probably is!
Speak to an IFA about investing money for beginners
Of course, despite the fact that there are numerous DIY investment platforms available to lay investors now, our number one investment advice for beginners is to seek the expertise of an independent financial adviser (IFA) to ensure the maximum gains with the minimal risks. Acumen’s experienced IFAs can advise you on the best way to achieve your aims and help to ensure your investments realise the outcomes you want. Also, we have a useful video produced by Daniel Frampton, which talks you through investing money for beginners, in a lighthearted, easy to follow style.
Acumen offers independent investment advice, outsourcing the daily management of funds to one of our trusted network of investment advisers. This enables us to focus on what we do best, financial planning and places your assets in the hands of investment experts who have the resources and industry knowledge to deliver the best possible results.
AdviceDecember 14, 2012
Good news for investors!News from the US that the Federal Reserve has linked interest rates to the unemployment rate is unpr....
AdviceFebruary 27, 2013
Changes to the UK State Pension systemThere has been a lot of newspaper inches devoted to the new state pension announced by the Coalition....
AdviceAugust 20, 2014
Is a pension the only way to save for retirement?Acumen is regularly asked for advice about the best way to plan for retirement and whether pensions ....