Beginner’s guide to investing

New to the world of investments? Here’s how to get started…


Why you should consider investing

Investing is a great way to potentially grow your money. Whether you’re looking to pay off your mortgage quicker, boost your retirement fund or provide financial security for your child’s future, investing could help you get there quicker.

But before you part with your cash, you need to be prepared for a long-term commitment. If you can’t lock away your money for at least five years, investing may not be the right choice for you.

It's also important to remember that any investment comes with risk. All investments can go down as well as up, and you may get back less than you invest.

If you're unsure about your investment options, we'd always advise talking to a Specialist Financial Adviser from Wesleyan Financial Services. Book an appointment for a no-obligation consultation.

Investment asset classes

You can invest in lots of different ways, but most investments will have exposure to different 'asset classes'. Of these, stocks (also known as ‘equities’ or ‘shares') are perhaps the best known, but there are more to choose from. Each asset class has different risk and return characteristics.

As a rule, the level of risk matches the potential reward or loss, meaning high-risk asset classes hold the potential for a greater return but also the greatest loss.

Examples of asset classes

Below are five asset classes people commonly invest in.

  1. Cash
  2. Stocks
  3. Property
  4. Bonds and gilts
  5. Commodities

1. Cash

Cash, as an asset class, comes in a variety of forms. It includes money deposited in banks or held by other financial companies and individuals.

What you should know:
  • Cash assets are great for quick and easy access to your money
  • They can also help keep the value of your savings relatively stable
  • Your investments will grow more when interest rates are high than when they are low
  • The buying power of your money will fall if inflation is higher than the return on your cash investments after charges; you can see the potential impact of inflation in our handy inflation calculator

It’s possible to lose money invested in cash assets, especially after fees are included.

2. Stocks

You can buy company stock (also known as shares) to effectively own a percentage of the business. If the company is successful, and the value of its stock rises, your investments may grow in value. Prices can rise or fall depending on the economy and the stock markets. You can often get some income (known as dividend income) from your investment. It’s normally paid twice yearly and is simply a share in the company’s profits.

What you should know:
  • Company stock is more suitable for investors who are willing to take a higher level of risk with their money
  • Dividend income from company stock, like share prices themselves, can rise or fall and is not guaranteed

3. Property

Typically, you can invest in two types of property: ‘residential’ and ‘commercial’.

While it is possible to invest directly in commercial property, it's very expensive and most investments are therefore made through funds. Examples of commercial property include office blocks, retail units, factories and warehouses.

What you should know:
  • An advantage of investing in commercial property is that tenants generally sign long-term lease agreements, which means the level of rental income is predictable and more secure
  • Commercial properties require a lot of paperwork to manage contracts, tenants, tax and insurance
  • It can be difficult to sell residential or commercial property quickly at a good market price. And property funds may suspend sales for a period of time.
  • Some property funds invest in the shares of building or property management companies, rather than the buildings themselves. The value of these funds can rise and fall quicker than ‘bricks and mortar’ funds

4. Bonds

A bond is essentially an IOU from a company (a corporate bond) or government (a government bond). They seek to raise money with a promise to pay it back later. A bond issued by the UK government is called a gilt.

There are two common types of bonds: ‘fixed-interest’ and ‘index-linked’:

  • A fixed-interest bond makes regular payments that reflect a pre-agreed fixed rate of interest
  • An index-linked bond makes variable interest payments linked to an index, such as the Consumer Price Index, which measures inflation
What you should know:
  • When interest rates rise, the value of an existing bond typically falls, and vice versa
  • Bond prices will fall if an issuer is less likely to be able to repay than previously thought –  you’ll see this as a fall in the issuer's credit rating; bond prices may also rise if the confidence in the issuer strengthens
  • Longer loan periods generally lead to larger rises and falls in value

5. Commodities

Commodities are goods such as oil, coffee, gold and silver. Commodity investments can be extremely profitable, but they also involve a high risk of loss. This is because investors aim to make money by predicting future changes in supply and demand.

What you should know:
  • Commodity investments are higher risk, especially if you invest in only a small number of commodity types that form a large portion of your overall savings

If you do want to invest in commodities, consider investing in them as part of a diversified fund; it will help to balance your overall risk.

A managed fund

A managed fund, with an experienced fund manager deciding how and where to place the investments, will typically invest in a combination of asset classes. This is to help spread the risk associated with investing in just one asset type.

A stocks and shares ISA, for instance, often sees your money invested in a fully managed and diversified fund. Also offering tax-free returns up to a certain level of investment, it is one option for any beginner starting out in investing. Alternatively, and if you're feeling a little more confident, there are also stocks and shares ISAs that require you to choose your own investments.

Understanding investment risk

Even if you’re new to investing, you’re probably aware of the ups and downs of the stock market. Where there’s potential to gain, there’s the potential to lose.

While a high-risk investment may result in higher returns, if you’re prone to feeling anxious or would want to withdraw your investment after a loss, it might be best to choose a lower-risk investment option.

There's no one-size-fits-all approach to investing, so don’t feel disheartened if your approach is different to someone else’s. Always adjust your goals and investment levels to something you feel comfortable with.

Choosing your timeframe

Once you’ve established your financial goals, you’ll need to consider the length of time you can realistically invest for. Though you can usually withdraw your investments at any time, staying in the market often increases your chance of a higher return. It also presents the opportunity for compound growth (where you’re reinvesting your interest or dividends).

The recommended timeframe for an investment will be a minimum of five years but typically 10 years or more. Deciding a timeframe will depend on how much you’ll need to invest each month, or year, to stay on track towards reaching your goals.

You should also consider whether there’s time for your investment to grow and ride out potential fluctuations within financial markets.

Deciding how to manage your investments

When it comes to managing your investments, you have two main options. You can choose to invest yourself by buying individual assets or leave it to a fund manager by investing in managed funds.

If you don’t feel confident selecting your own investments, a managed fund takes the responsibility out of your hands. A fund manager will have experience of investing in markets and is there to make informed decisions on your behalf.

When, where and how long to invest for

The more time you spend in the market, the more likely you are to see higher returns on your investments over time. And the sooner you get started, the sooner you’ll be on track to see your investments work for you.

Though you can make reasonable predictions on the potential return of your investments, it isn’t possible to know what the future will hold. You could invest a large sum of money a few days before a large fall, which may take years to recover and show the return you’re looking for.

However, if you invest regularly across multiple asset classes, industries and geographical locations, you are better placed to balance the risk of your investments. A managed fund offers this.

Avoid being 'out of the market'

In the world of investing, cashing in your investments is known as ‘being out of the market’. Remember we said earlier that investing is a long-term commitment? When you’re out of the market, you can potentially miss out on the best days for investment gains and performance.

Calculate your potential returns

Though it’s impossible to know how your investments will play out, you can get an idea of your potential returns over time. Try our investment calculator to see your potential long-term returns.

Investment tips for beginners

1. Never invest in something you don’t understand

It can be tempting to invest in a company based on a trusted recommendation. But you should find out more before you invest, such as the financial history and health of the company.

2. Don’t invest with an entity you don’t trust

Be cautious of unsolicited calls and search results on the internet. Where money is involved, people will go to great lengths to take it from you.

3. If an investment sounds too good to be true, it probably is

Be wary of ‘guaranteed’ high returns. If you’re unsure whether an investment opportunity is legitimate, seek advice from a trusted financial adviser.

Seeking financial advice

The world of investing can seem a daunting prospect, particularly when you’re new to it. There is help available and if you are uncertain in any way about how to invest your money, it is always advisable to seek professional financial advice first. Not only will you have expert guidance on all aspects of investment, but it can also give you the confidence to take the first steps on your investment journey.

A Specialist Financial Adviser from Wesleyan Financial Services can help you to understand how stock markets work, the risks involved, the potential returns you could see from investing, and more.

If you feel you need a little more advice before investing your money, speak to one of our Specialist Financial Advisers.

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