If you’re an employed adult in the UK, the chances are that you’re already an investor. If you’re enrolled in a defined-contributions pension scheme, your pension contributions are probably being invested for your future. If you want to go further, you might want to start investing for yourself. It may be easier than you think. Here are some tips to help.
You generally want to clear off consumer debt first
Consumer debt basically means high-interest debt. If you start investing while you’re still paying off debts, any gains you make will probably be more than offset by the extra interest you’re paying on your debt. If you make losses, you’ll have lost money you could have used to reduce the interest you pay on your debt.
Debt such as mortgages and student loans is a bit different. This tends to have a lower interest rate. You, therefore, have a better chance of making returns that pay the interest and leave you with profit on top.
Make sure you have an emergency fund, savings and insurance
You need to be clear about the fact that investing puts your funds at risk. The value of your investments can go down as well as up. If they go down, they might or might not recover. If they do recover, it might take them a long time to make that recovery.
Another possibility is that you experience market volatility or turbulence. This is when there are frequent rises and falls in share prices. If enough shares have enough volatility, then investment funds might start to exhibit volatile behaviour.
This means that you should think of investing as being a bit like gardening. Your shares are like seeds. The chances are some of them are simply not going to grow. Others will grow but possibly not as well as you’d like. Of the rest, some seeds may grow quickly but take time to bear fruit (issue dividends), others might grow slowly but at least give you some fruit (income).
While you are tending your investment garden, you need to ensure that you can keep on paying your bills in the present. You also need to ensure that you can deal with any one-off expenses including unplanned ones. This means you need regular savings, an emergency fund and suitable insurance cover.
Have an investment strategy
It can be helpful to have a goal in mind so that you can plot an investment course towards it. For example, investing for your retirement in 40+ years your strategy may suggest a very different approach than investing to buy a house in 5 years or so. In fact, it may require a very different approach than investing for your retirement in 5 years or so.
Your investment goals may also determine how much you need, or want, to invest. To be clear, your investment funds need to come from money you can afford to lose. You should certainly be able to live without it for 5+ years. It is, however, entirely up to you whether or not you invest all of your spare cash or whether you keep some aside for other purposes.
Having an investment strategy may also help to keep you from buying and selling too frequently. There are three main reasons this is a mistake. Firstly, you need to give your investments a fair chance before you decide whether or not they’re for you. Secondly, you may find yourself paying transaction fees on each trade. These can soon eat into your profits.
Thirdly, and possibly most importantly, any time you sell shares you make yourself potentially liable for Capital Gains Tax. This reality needs to be factored into every sales decision you make.
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