How to Start Investing: A Beginner’s Guide to Growing Wealth

Investing is a way to make money by owning assets that are expected to rise in value and/or generate an income. It can help you achieve financial goals such as buying a house, paying for your child’s education or enjoying a world cruise. 

Over the longer term, investing can enable you to amass a substantial pot of money to help fund a carefree retirement without needing to work. But although it’s a terrific way to grow your wealth, many people are put off as they see it as overly complicated and riddled with jargon. They also fear a sudden stock market downturn will be enough to wipe out everything they’ve put away so end up tucking it all in savings accounts.

However, that can be a dangerous strategy. Unless the interest being earned is above the rate of inflation, the value of their cash will be gradually eroded. 

So, what’s the solution?

In this article, we look at how to start investing, the pros and cons involved, the types of assets available, and the best investment options for beginners. 

Why should you start investing?

The earlier you start investing, the longer you have to make money. If you begin in your early 20s then you have almost five decades before you retire. But this isn’t the only benefit. Another is riding out stock market volatility, as your portfolio will have time to recover from any fluctuations. 

Then there is pound cost averaging. This is a popular financial technique that enables you to smooth out returns by investing regularly. Investors buy units of a fund each month – at whatever price they are currently available – and take advantage of any market dips. For example, if you regularly invest £200 into a fund and have been buying units at £6 each, should they fall to £4 you will get more units for your money. 

Investing can also help counter the effects of inflation, which is the percentage by which the prices of goods and services increase every year. The current rate of inflation has to be one of your main considerations when looking at how to start investing in the UK as it will illustrate how much you need to make. For example, if annual inflation is running at 5% it means something worth £100 today will have increased to £105 in a year’s time. Therefore, if you have all your wealth in a savings account paying 4%, it means the real value of your money will actually be declining.

Compounding is another upside of investing. This refers to creating wealth by earning interest on interest/income that’s already been received. Say you start with £100 and at the end of the year have earned 5% interest/income, you’ll have made £5 and now have £105. In the following year – presuming the interest/income rate remains the same – you’ll earn 5% on £105, which is £5.25. Your initial £100 investment will now be worth £110.25.

Find more jargon busters in our investment glossary

Understanding the basics of investing

In its simplest form, investing involves buying assets in the hope that their value increases over time. Some also provide an income that can be withdrawn or reinvested. There is a wide variety of asset classes in which you can invest. Among the most popular are equities; bonds; property; and commodities.

Equities

The term ‘equities’ refers to buying shares in companies that are listed on global stock markets, such as the London Stock Exchange. The value of shares rise and fall depending on factors such as company results, economic factors, and market sentiment. The aim is to earn a return in the form of capital growth, income (from the company paying you dividends out of profits made), or a combination of both.

Bonds

Bonds involve loaning money to either a government or company in exchange for a fixed rate of interest over a pre-determined period – and your original investment returned on a future date. The issuers of these bonds are rated based on their likelihood to keep up with these repayments so you have an idea of the risk being taken. Bond prices fluctuate due to interest rates and the credit worthiness of issuers. However, bonds issued by stable governments are regarded as being safe investments for beginners

Property 

This is generally classified as commercial property, such as shops, offices and retail parks, as opposed to residential housing. Investors stand to gain from increases in the valuations of such properties, as well as the rental income that’s received.This isn’t the same as investing in the shares of companies involved in property as this will be no different to equity exposure.

Commodities 

This area includes gold and other precious metals. Investors can either buy the physical asset or through products such as commodity exchange traded funds.These products provide access by either tracking the price of a particular commodity – or a basket of them – and are traded on stock exchanges. You can also buy the shares of companies involved in mining. However, as with property, this will be an equity exposure so won’t provide you with as much diversification.

Pooled investments

A popular alternative to buying individual assets is opting for an investment fund that will already hold a variety of positions. There are thousands of funds available. Some focus on particular geographies or industries, while others offer exposure to different asset classes. Many of them benefit from having a fund manager, backed by a team of analysts, who will be responsible for making the buying and selling decisions.

Steps to start investing as a beginner

Your first step is understanding why you’re investing. Do you need to generate a specific amount to buy a new car, make some home improvements or send your child to university? Maybe you’re looking to generate a monthly income to help make ends meet or perhaps the goal is to build up a substantial pot of cash for your retirement.

The answers to these questions will not only dictate how much you need, but which assets you should consider and the most suitable investment vehicles.

For example, if you’re after double-digit returns then you may need to opt for riskier investments such as emerging market equities. However, if you’re fast approaching your financial goal’s deadline then you may switch to less risky assets such as government bonds and accept that your investment won’t grow at the same rate.

Once you’ve decided on your asset allocation, you’ll need to decide which type of investment product meets your needs.

If you’re looking at how to start investing in stocks in the UK, then brokerage accounts, many of which are available online, enable you to buy stocks, bonds, funds and other assets. For those more focused on the future, a pension plan with an insurance company, bank or investment firm may be more suitable. However, you’ll need to be aware that you typically won’t be able to access funds until you reach a certain age. It’s also important to check the fees being levied.

Arguably the best way to start investing for beginners is with a Stocks & Shares ISA as any gains generated will be tax free. These wrappers allow you to invest in assets such as company shares, corporate bonds, government bonds, unit trusts and investment funds. Stocks and shares ISAs can be opened by those aged at least 18 years old, while the current annual investment limit is £20,000 during each tax year.

As part of your fund selection, lower-cost investments are worth considering, especially for those taking their first steps. These include so-called passive funds that replicate a particular index, such as the FTSE 100, as opposed to those which are actively managed. This means their costs are lower and explains why they are popular with people exploring how to start investing with little money.

Read more: The most googled ISA questions… and their answers

Long-term vs short-term investing: what’s right for you?

The benefit of long-term investing is that the money put away has longer to work on your behalf. In most cases this will be a benefit. Compounding growth, riding out stock market fluctuations, pound cost averaging and less stress are among the major upsides of a longer-term approach.

However, there are some potential downsides. For example, putting your money into companies or areas that are expected to do well in the future can leave you vulnerable to short-term volatility. You may be confident that the tiny tech firm will be the next Microsoft, but the value of your holding in the company may spend the next few years stagnant – or even falling.

Conversely, short-term trading enables you to take advantage of stock market fluctuations by buying shares that you believe are being unfairly penalised. For example, an energy firm may see its share price fall due to problems at one of its rivals. A trader would buy this stock and then reap the benefits when the market corrects itself.

Of course, this isn’t a strategy for the faint of heart. Even fund managers with teams of analysts can get these calls wrong so you’ll need to proceed with caution.

Fortunately, there is a middle ground and this is one of the most popular investment strategies for beginners. It involves having a core, stable holding in the centre of your portfolio – such as fund investing in global large companies – and then ‘satellite’ positions around the outside. This means the bulk of your money is invested in reliable companies that should perform as expected, with the remainder exposed to exciting areas that may enjoy unexpected hikes. One of the most popular is opting for a fund whose manager has the flexibility to change the portfolio’s focus.

Read more: Core and satellite investing explained

Common mistakes to avoid when starting out

One of the most common mistakes when starting to invest is not having a clear plan in place and just buying a random collection of assets. It’s also important to consider how much the investment will cost. The various fees involved can be easily overlooked but they can have a devastating effect on returns.

Taking a short-term view is another mistake. Stock market investing is volatile so ideally you need to be investing for at least five years. Similarly, making rash decisions – such as selling on overnight stock market falls – should be avoided as it can mean you miss out on a subsequent recovery. Remember: although the value of your holdings may fall, you’ll only crystallise your losses by exiting the position.

Conversely, maintaining a position against all reliable evidence is also an error as this can result in you losing money due to stubbornness. 

Case study: How FundCalibre helps new investors

FundCalibre’s expert team analyses more than 3,000 funds and trusts before whittling them down to a preferred list of roughly 200. 

This enables UK investors to quickly see our preferred portfolios in different sectors and the reasons behind our decision making. Trusted funds are given our ‘Elite Rating’. Typically, this is awarded to no more than 10% of funds in any sector. The rationale is simple: the fund is good enough or it’s not. Fund managers must boast track records of at least three years to be considered for inclusion, while risk-adjusted performance is measured by our AlphaQuest quantitative screening tool. 

Of course, 200 funds still represents a lot of choice. Therefore, a decent beginner-friendly investment strategy would be a diversified multi-asset fund.

Read more: How to invest when there is too much choice

FAQs: Answers to common questions about investing

• How much money do I need to start investing?
  

  Many platforms allow investing with just a little money. You’ll need to do your research to see which is most suitable and whether they offer exposure to the assets in which you want to invest.

• What is the safest investment for beginners?
  

  Index funds and diversified exchange traded funds (ETFs) are typically considered lower-risk options for those starting their investment journeys. This is because they effectively replicate indices rather than having an active manager who can potentially make the wrong decisions.

• Should I invest in stocks or funds as a beginner?
  

  Funds (ETFs and mutual funds) are generally safer for beginners as they’re not so reliant on a handful of stocks performing well.

• How do I know if I’m choosing the right investment?
  

  It’s important to do your research. There’s lots of information available, including from independent rating platforms such as FundCalibre.

• What’s the difference between passive and active investing?
  

  Passive investing (index funds) involves replicating a particular index, whereas managers of active funds have greater scope to buy and sell assets. The former is cheaper. However, active managers may have a chance to outperform the market.

Final thoughts: Getting started with confidence

The good news is that it’s very simple to start investing – and you’ll be grateful you made a start when you have built an impressive nest egg.

As a quick reminder, here is what you need to get going:

• Step one: Decide your financial objectives
• Step two: Establish your risk appetite
• Step three: Do your research
• Step four: Make your asset allocation calls
• Step five: Choose your assets or funds.

Of course, just because you’ve made these decisions doesn’t mean you can relax forever. It makes sense to regularly revisit these calls to ensure your positioning still meets your needs.

Our plans and financial priorities can change quickly so reconsidering your investment positioning at least every year can help you stay on track.