Investing: it’s something we all know we probably should be doing with our money, but all that talk of share indexes and dividend yields and adjusted earnings can seem a bit overwhelming. The tendency is to just stick our cash into a savings account and forget about it, at least until we check our balance, look at the interest payments and think, ‘Really? Is that all?’
Don’t be one of those people: take some time to consider if investing if right for you and all of your options. Then you’ll need to make the following decisions before you start investing:
What to invest in?
The first decision you’ll have to make is what to invest in. That means whether you want to buy shares in individual companies, which could be large household names or smaller, younger, companies, or whether you’d prefer to invest in share-based funds.
For most beginners, investing in individual company shares is probably not a good option. It’s simply too risky to tie your money to the fortunes of one or two companies.
That’s why many people, and especially those who aren’t stock market whizzes, prefer to invest in share-based funds instead. Share-based funds invest in dozens, if not hundreds of different companies and when you invest in a fund, your money is spread between these different companies.
Depending on the fund you invest in, you could invest your money in companies that are based in or operate in different parts of the world, that are small or large or that operate in any number of different sectors. Different funds also have different approaches to risk (such as cautious, balanced and adventurous), and together with the 1 to 7 risk ratings you will need to decide on what level of risk you are comfortable with.
Active or passive?
The next decision you’ll be faced with is whether to invest actively or passively. It sounds like one might involve punishing gym circuits and the other involves sleeping, but what it refers to is how the funds you invest in are run. If they’re ‘active’ or ‘actively managed’ it means that there’s a fund manager who decides which shares to buy, which to sell and when to do this.
If it’s a passive fund, it aims to replicate the performance of a particular stock market index. What that means in English is that if, for example, you invest in a passive fund that tracks the FTSE 100 index, it will try and mirror what happens to that index. If the FTSE 100 goes up by 10%, so should the fund. If it falls by 10%, the fund should fall by the same amount.
There are pros and cons to both. Passive funds often have lower costs, which means you should keep more of the return. However, although you may outperform the market with actively managed funds, you may also underperform it, depending on the decisions your fund manager makes. Experts see value in both approaches and often combine them.
Where do you go to do it?
There are different ways you can invest from going direct to the investment company to taking advice from an independent financial adviser. There are pros and cons to each and it may come down to how confident you feel and your budget.
Investing with an independent financial adviser
If you want to get advice from an expert on how to invest, you should talk to an independent financial adviser. You’ll have to pay for their time, but some offer cheaper advice options, such as online advice or advice over the phone.
This may be a good option if you have a large lump sum to invest or if you don’t feel confident doing your own research. You’ll get expert advice on what to invest in and the adviser can also take your wider financial goals and plans into account.
However expert advice like this doesn’t come cheap. Financial advisers charge anything from £100 to £300 an hour for their time for face-to-face meetings. Some will offer advice on investing for a fixed fee or a percentage of the amount you invest.
Investing through a platform
Think of a platform as an online supermarket for investments (but without the bizarre substitutions on your delivery). A platform lets you buy, monitor, switch and sell your investments. There are two main ways you can invest through a platform:
- You can choose which funds to invest in yourself. Most platforms have lots of information about the funds they offer.
- You can choose a ready-made portfolio. You’ll normally have to answer some questions about why you’re investing, how long you’re investing for and how much risk you’re able to take. This platform will then suggest a selection of funds for you.
A platform is a low-cost way of getting started in investing if you want to invest a monthly amount, or if you’ve invested before and you want control over where you invest. The advantage of using a platform is that you can invest in a wide range of funds and keep all your investments in one place.
The main drawback is that you will have to pay the platform for using it. In fact, there are normally several fees, which will vary from one platform to another.
You don’t have to use a platform, as you can cut out the middle man, go direct to the company that provides the investment funds and buy from them.
This is suitable for someone who knows exactly which fund they want and prefers to keep their investments separate. You also won’t have to pay a fee to a platform or a financial adviser or broker.
However, if you invest in different funds from a range of providers, you may have quite a job keeping track of all your investments.
We hope this has given you an idea of some of the options beyond plonking your cash in a low-interest bank account: best of luck in selecting the right investment path for you.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.