By Nathan Barnett, Editor at Finance.co.uk. Last updated 31st January 2023.
Brexit, COVID-19 and the war in Ukraine have all contributed to a sense of financial uncertainty, and with the impact of increased pricing on food, fuel and mortgages, you might be considering how you could start investing for the long term to help beat inflation.
Investing could provide you with long-term financial independence if you have your immediate personal finances under control.
There are many considerations for new potential investors because investing your money contains a level of risk, which we’ll explore below.
Whether it’s putting money in a pension, an ISA, a fixed rate savings product or investing in stocks, bonds, funds, options or other securities, investing may help to protect and grow the value of your money.
Whether you’ve received a lump sum through redundancy or inheritance, or you’re looking to regularly put away money for your future, there are many options available, all with unique considerations and different levels of risk associated.
It’s recommended that you ensure your finances are in order before considering investing.
For example you should definitely;
If you’re confident that your finances are in good shape, you should next think about your goals.
What are you investing for? What are your life and money goals, and are they long term or short term? Is investing the right way to reach these? Could you use the funds elsewhere, to overpay on your mortgage or clear long term debts, for example?
You should consider 5-10 years as a reasonable short term period to accrue and compound your returns, and allow for any market downturns.
You should also note any big life changes that might be on the horizon in that timeframe, for example a new baby, health concerns, moving house or retirement, all of which may mean you need access to your money quickly.
Market fluctuations may mean in the short term you could lose money by needing access to it quickly, especially when you consider any fees involved.
You need to think very carefully about your options before investing in case your money could be better used elsewhere.
If you haven’t used your annual ISA allowance, you may wish to use your personal tax free allowance and invest via an investment ISA. Also known as stocks and shares ISAs, these accounts allow you to invest in funds, or select individual stocks and shares.
Junior stocks and shares ISAs are designed for those looking to put money away for children who can access the funds when they turn 18. Any parent or guardian can open an account and friends and family can invest on your child's behalf.
If you have a remaining pension allowance, you may wish to use a private pension or top up a workplace pension.
A share dealing account allows you to invest in stock and shares as well as a wide range of other investment types.
For more experienced investors looking for tax efficient investing there are also EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) options, which enable investment in high risk, early stage enterprises.
If you’re comfortable with a high level of risk, you may want to consider investing all of your funds in one go, known as a lump sum. For example, if you’re looking to use up any remaining ISA allowance, you may do this as a lump sum.
Regular investments can be less risky, because you can control how much is invested over a longer period of time, so any fluctuations in the market can be reviewed before investing your next portion of cash
If you’re looking for regular income from your investments, for example, if you’ve retired, you may want to opt for an income fund. These funds provide a regular income paid out from the fund, with the added benefits of the remaining cash invested sitting in the fund long term.
If you don’t need to receive a regular income from your investments, you could opt for accumulation funds, which reinvest any income in the fund, compounding the funds results over time.
A share is one unit of ownership of a company. When a company is listed on a stock exchange, these shares can be traded and owned by the general public.
You can buy and sell shares directly via stock exchanges. The price of a share will change throughout the day based on changes in its supply and demand as investors buy and sell based on their potential future value.
Funds are collections of different assets, such as company shares, gilts or bonds, grouped together by a fund manager. Fund managers will pool your money together to buy these assets on your behalf with the view to increasing the overall value of the fund over time.
ETFs are funds designed to specifically track (or follow) the value of different global markets, indexes (like the FTSE 100), or commodities (like gold). Fund managers will manage your money to mimic the performance of an index or commodity over the long term.
Governments and companies can raise capital through selling gilts and bonds to investors. Bonds and gilts are loans, and when you buy a bond, you are lending money to a company or the government. You can purchase bonds and gilts through a stockbroker or their bank, or directly through the DMO’s purchase and sale service.
Bonds and gilts offer a fixed rate of return over a set period of time, so may provide a more predictable income than other types of investments.
Investment trusts are companies listed on a stock exchange that make money by investing in other companies. As they are listed on a stock exchange, the general public can also own shares in these companies.
The price of the shares are based on the value of investments and the supply and demand of shares in the company, making these potentially higher risk investments that bonds or ETFs.
Talk through your options with your partner or family member, especially if you share bank accounts or a mortgage. If you’re unsure about how to proceed then talking to an FCA registered independent financial adviser could help you find the right investment products for you.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.