Best Advice for a First Time Investor

A question we are regularly asked is when is the best time to start saving for your retirement? The simple answer is now!

Whenever you are reading this article, whatever age you are, the best time to focus on your investment plans – whether that is saving for your future, or putting some funds aside to support a loved one – is today.

Of course, the earlier someone starts putting money aside, the greater their potential is for reaching their financial goals sooner, but investing for the first time can be daunting. If you are starting young and in it for the long term, the best advice we can give in general is to be patient and give yourself time; very few get-rich-quick schemes actually work, so it’s much better to plan to get richer slowly.

If this is your first time investing, it might be useful to start with a simple definition. Investing simply means setting some of your money aside and putting it to work for you. When you invest, you’re buying into something you believe will increase in value over time. While interest rates are going up at the time of writing, investing still has the potential to generate a better return than a savings account. While your money’s not locked away, you should be prepared to set it aside for at least five years to give it the best chance to grow. Investors must always be aware that the value of any investment can jump around so you could potentially get back less than you originally put in.

If you want to know more about investing, here are some tips to help you get started:

Know Your Budget

The first thing for anybody considering investing is to know what their available budget is. Can you, for example, live on 80 percent of your income and save 20 percent every month? Look at your total income versus your total outgoings and make sure that you’ve got sufficient surplus funds to actually put some money aside to invest.

A way to manage this is to transfer funds out of your current account each month. If you get paid on the 27th of every month, then put some money into a separate account on the 28th. Even if you leave it as cash and you don’t invest it immediately, putting that money into a savings account so that it’s not easily spendable is a good way of proving you can live without it.

We call this way of saving ‘Pay Me’; it’s a way of getting used to paying yourself from your wages, as you would do with your other bills each month. This skill to save regularly leads to a pot of money that builds up over time.

What’s Your Time Horizon

The next most important thing is knowing when you want to see your money back; ask yourself what are you saving for? If you are in your early 20’s and saving for retirement then you can afford to take a few more risks, over a longer period of time. If you are saving up for a house in maybe five years time, then it doesn’t matter what age you are, you want to be slightly more balanced – lower your risk but understand you may need a fixed amount back to cover a deposit.

The key is to identify what your goals are for that particular slice of money, and how long you can wait to achieve it. There’s no right or wrong answer; it’s about each individual finding a balance.

Understand your goals

Depending on the client, different timelines and different goals can lead to a different tolerance for investment risk. You can actually have a short- or medium-term goal, say over five to ten years, but you are risk averse and therefore want a more cautious portfolio. Alternatively, we meet clients that may have the exact same timeline and goals, but be far more happy to take on greater risk, accepting the volatility that comes with it in exchange for potentially earning greater returns.

Understanding your appetite for risk

The level of investment risk that is right for you depends on a number of factors. When making decisions on how and where to invest your money, one of the most important questions to consider is about risk. How much is right for you? While it is obvious to most that taking on too much risk is a bad idea, it can also be limiting in many cases if you don’t accept any risk when investing for retirement.

In fact, many people are reluctant to invest because they don’t understand the long-term balances between risk and reward – and how getting the balance right can increase your options for future life.

Manage your investment expectations

We talk to first time investors about their expectations; what they want to achieve and how long it might take to achieve it. Investors need to be prepared for the fact that they may be on a rollercoaster and there will be ups and downs.

The thing to impress upon investors – particularly those that have perhaps tried to invest in cryptocurrency, for example, in order to get rich quick, is that this market experiences exceptional volatility, which also puts people off investing. But in the long term, with the right plan and the right advice investors have the potential to become wealthy.

Asset classes

For a beginner, it’s important to understand what the types of investment or ‘asset classes’ are and what the risks and rewards are in each asset class.

Cash is the first class. The biggest risk in holding cash is inflation; specifically what you have now may not be worth as much as you have later. Interest rates on savings may also go down but otherwise it’s generally very safe.

Bonds are slightly more volatile than cash, but generally safer than equities.

Equities are far more volatile, have more ups and downs, but over the long term and in general you should see better growth.

Worst piece of advice for a beginner

The worst advice we hear is ‘don’t worry about it, do it next year’. Next year will never come and the more you delay, the further away you will be from your goals. The earlier you adopt that saving mindset, even if it is just 20, 50 or 100 pounds a month the more powerful the impact will be over time and the better position you will be in later on in life. Secondly, we always advise people not to follow fads.

Making the pieces fit

For a first time investor, understanding the various investment vehicles, their associated levels of risk, the possible tax implications and how they work as part of a wider financial plan is crucial. That’s why this is an area where financial advice is invaluable. Most people planning to invest will consider several different types of investments and income sources. While this means you have more choice and flexibility, you also have more responsibility for managing your money and knowing which assets to tap into.

Get in touch with us today to find how you can build a holistic retirement plan tailored to your financial goals.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.