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In the first of a three-part series This is Money is running in partnership with investing platform Nutmeg, we look at how to get started as an early investor.
You’re climbing the career ladder, enjoying life and hoping to one day own a home but the prospect of saving up several thousand pounds can seem daunting.
Interest rates on savings accounts are currently very low, with savers forced to choose between easy access deals that pay less than inflation or longer term deals that require them to lock their cash away for several years.
The longer you leave money invested, the better the chance that you’ll see a positive return
Either option is unlikely to help your money grow and its value could even deteriorate as a result of inflation eating away at it.
But saving in cash isn’t the only way to build up a deposit; depending on your timescale, investing could be a sensible alternative.
Here, we lay out what to think about when deciding whether this could be the right approach for you.
Why start investing early?
The longer you leave money invested, the better the chance that you’ll see a positive return.
This is because long-term, stock markets tend to rise and profits can be reinvested, allowing you to earn returns on your original savings and the returns you’ve made.
This is known as the magic of compounding – earning interest on your interest – and it’s the strongest argument for why to invest.
Lisa Caplan, head of financial advice at Nutmeg, explains: ‘The sooner you can start investing the better as compounding works over time. Investing is for the long term, so the longer you’re in the market the better, to get the best returns.’
The timeframe is important. You’ll need to think about when you’re hoping to use the money you plan to invest – a good rule of thumb is not to invest any money you might need access to in the immediate future.
This is because stock markets can be volatile and the value of your investment can go down as well as up.
Over the longer term – say between three and five years – this volatility is usually smoothed out and overall, the value of your investment is likely to be higher than the original amount you put in.
This is partly to do with share prices rising but also, crucially, because many companies pay dividends which can be reinvested, boosting your earning potential through compounding.
Lay the groundwork
Before rushing headlong into investing, there are a few basic steps to take first.
‘Pay off any high interest debt, such as credit cards, and make sure you have a cash cushion of at least three month’s expenditure,’ says Caplan.
‘If you have anyone who depends on you financially, think about some insurance cover as well.’
As Caplan says, building up a cushion of cash savings is vital before you starting siphoning money off into an investment.
You want to put yourself in a financial position where you don’t have to dip into the money you’ve invested in order to pay for a rainy day.
Once these things are ticked off the list, you can consider investing some of your savings.
How to set your investment goals
First things first, know what you’re investing for.
If it’s a deposit to buy a home, there are some schemes available from the government that can boost your savings significantly. These include the Help to Buy Isa and the lifetime Isa.
Saving for your first home? There are several government schemes to boost your capital
Both mean the government will boost money you save through the accounts by several thousand pounds, but there are quite complicated terms and conditions on how and when you use the money saved so make sure you do your homework first.
If it’s for retirement, a personal pension or lifetime Isa might be the best option as both of these offer savers government top-ups to their savings.
Again, it’s important to do your homework before you lock your cash into either as there are hefty penalties if you want to take your money out of a pension before you retire and out of a lifetime Isa, unless it’s to fund the purchase of your first home.
Everyone is entitled to invest £20,000 in each tax year tax-free into a stocks & shares Isa and most investing platforms also offer standard investing accounts, though income and capital gains tax is payable on any investments held in these.
Risk and reward
The next thing to consider is risk. This can be really off-putting for those new to investing – risk sounds bad.
But it isn’t. Risk is just the name given to how likely it is that you’ll get the return.
‘It’s not feeling confident you know enough to make the right decisions and take the right investment risk that makes first-time investors nervous,’ says Caplan.
‘When I speak to people about risk, I explain the cost of better long-term returns than cash comes at a cost of losses.
‘You need to keep your longer term goal in mind, be brave, and take a sensible amount of risk – an adviser can help you decide what that is.’
What to invest
Set up a regular investing habit: Drip-feeding your money into the markets can help you smooth out bumps in volatility
How much new investors should look to put away depends on your individual circumstances but little and often can be a better approach than investing a lump sum all in one go.
This is because drip-feeding your money into the markets can help you smooth out bumps in volatility – sometimes you’ll buy when prices are high, other times when they’re low, helping you achieve an average.
‘I think it is helpful to set up an investing habit,’ says Caplan. ‘Set up an automatic payment from your current account that goes at the beginning of the month to your investment pot.
‘That way you won’t be tempted to spend it, and over time your pot should grow. Even if you start small, get started.’
What to invest in?
Finally, you’ll need to think about what you invest in. But how should new investors decide what to invest in and is there a good starter pack type bucket of assets?
‘Aim for a diversified portfolio rather than picking individual shares,’ says Caplan.
‘Index linked funds are very useful as they will cover a whole part of the market without you having to buy each share individually.
‘You will usually have a combination of different types of assets as well, such as bonds as well as shares. This will reduce investment costs which can have an enormous effect on the returns you get from your investments.’
MESSAGE FROM THE SPONSOR
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We’re on a mission to democratise wealth management. Our experts build and manage sophisticated global investment portfolios designed to help grow your wealth and reach your goals.
We use technology to give you a world-class service that keeps costs and charges low to boost your returns.
So – whether you’re starting with £5million or £500 – welcome to the UK’s largest*, and fastest growing** digital wealth management service.
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*Source: Boring Money, Online Investing Report 2019
**Source: PAM Asset Management, at the end of 2017 Nutmeg was the fastest growing wealth manager by percentage increase in customers over three and five years