Iona Bain

The art of investing – and why it’s never too late to start

The art of investing – and why it's never too late to start
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I'll admit this doesn’t seem like a brilliant moment to start investing. Inflation is becoming a problem due to labour shortages and the energy crisis. Central banks have already responded by raising interest rates and stopping the money printers. Firms could face higher costs whilst also posting lower profits and returns as people rein in their largesse. The best performing equities of the past decade (like Tesla and other Big Tech companies) could suffer, as investors flock to traditional safe havens.

And yet the spike in the cost of living and the prospect of inflation mean fed-up savers are rightly looking for ways to take matter into their own hands. The operative words here are 'if' and 'could'. We can only make educated guesses as to what will happen. But one thing is as close to certain as we’ll ever get. While investing is inherently risky, if you follow certain key principles, you can reduce the chances of losing money and increase your chances of making it.

And, while there have been better times to invest, it’s more important just to start, period. The alternative is to let your money languish in a bank account while inflation whittles it away.

By way of example, Hargreaves Lansdown has calculated that if you put the average inheritance - £11,000 – in bog-standard savings over 20 years, you would lose £17,686 compared to if you invested it (assuming a 0.5 per cent savings rate versus 5 per cent annual investment return).

So, if there’s no time like the present, how can you get going? Firstly, workplace pensions come with unbeatable tax relief and free money from your employer, so maximise yours before you move onto investing. Work out how much you should be saving by checking out retirementlivingstandards.org.uk. Ask your employer if they will boost their contribution if you boost yours, known as contribution matching.

Next, ask yourself if you’re happy to pay a premium for expert help. If you have chunky five or six figure sums to invest, you could consult Vouchedfor or Unbiased to find an independent financial adviser. The advantage of an IFA (particularly if they’re chartered or certified) is that they can take an overview to work out how to manage your money as tax-efficiently as possible.

The downside is that they aren’t open to those with modest sums and the charges can be hefty. The Financial Conduct Authority says the average is 2.4 per cent of the amount invested for initial advice and 0.8 per cent a year for ongoing advice. Compare this to funds tracking the stock market which charge as little as 0.1 per cent.

Of course, high quality advice is excellent value for investors who are time-poor, cash-rich and have complex tax considerations. Everyone else will want to look at how they can invest smartly on their own at low cost, as excessive charges really eat into your long-term returns.

Think about your goals. A first property purchase that’s more than five years away could be achieved through an investment Lifetime Isa, which comes with a maximum bonus of £1000 a year. Putting £175 into a tax-free Junior Isa would cover all your child’s university costs in 18 years’ time, assuming 5 per cent growth per year in a managed fund charging 0.75 per cent a year, according to Fidelity International.

Your timeframe will determine how much risk you can take. For goals in the near-term (within ten years), you will need a more cautious strategy compared to goals more than a decade or two away, which allow you to be more adventurous.

That said, goals aren’t critical. You may just want an income to top up your pension, or a little nest egg you can grow. If so, set up a general stocks and shares Isa on an investment platform and drip-feed money into it every month through a direct debit.

More income-inclined? Focus on companies paying steady dividends. Going for growth? Build a portfolio spread across various promising sectors and countries. Funds offer instant, helpful diversification to spread your risks but you’ll have to decide whether to go active (via a unit or investment trust), or passive with a tracker or exchange traded fund. Certain active funds can perform better than the market thanks to a brilliant manager or because their style suits market conditions. But it’s certainly not a given.

Understand how much risk you’re comfortable taking, then look at which investments suit your risk appetite the most. Finally, bar the occasional rebalancing of your asset mix or adjustments if your circumstances change, leave your portfolio alone. It’s when you stick with your investments for at least five years, and start to earn compound interest, that the stock market really unleashes its wealth-producing magic.

Written byIona Bain

Iona Bain is author of Own It: How our generation can invest our way to a better future.

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