How do I start investing? What approach is right for me?

Robin Etherington, Chartered Financial Planner and Managing Director at Amber River HDA, answers a reader’s question on how to start investing and the right approach to take.

Question: I’m 41 and have reached a point in my career where I have enough income to start saving beyond the short term. I already own a home with a mortgage so want to look at investing as the next step. But how do I start investing? What approach is right for me?

Answer: Cash savings – savings in banks, building societies or National Savings – are great for the short term. If it’s money you are likely to need in the next three to five years or so, they are safe, and you’ll earn some interest. Most importantly, your cash will be there when you need it.

However, different factors come into play over the longer term. In particular, inflation matters far more. Experience tells us that cash savings don’t keep up with inflation in the longer term. This will eat away at the buying power of your savings over time.

This is where investing has a place. Investments such as property, shares and funds have generally provided greater protection against inflation over the longer term. They will tend to keep pace with economic growth and have delivered a higher return on investors’ capital.

However, the return from investments is inherently less predictable than that of a savings account. Stock markets for example will bounce around, commonly referred to as ‘volatility’. While they tend to recover in the longer-term, it can be unnerving in the short-term.

Nevertheless, there are ways to mitigate this volatility. A great way to start investing is to make monthly payments.

Not only is this easier for most people, who don’t tend to have big lumps sums lying around, but doing so averages out the buying price. This reduces the risk of putting money in the market just before a bout of volatility. You are putting money to work in a variety of market conditions.  

You can start small – many providers have no minimum investment amounts.  You can add occasional lump sums or gradually increase the monthly amounts over time. This also builds discipline around investing – you aren’t constantly worrying about whether it’s the right or wrong time to buy in to the market.

Picking the right investment can be a minefield for the novice investor. There is lots of choice and plenty of jargon. For most people, the key to successful investing is diversification.

In practice, this means spreading your risk across a range of companies, markets and sectors. Buying shares in just one company is tempting, but it is a high-risk strategy. Spreading your investment across many different types of company is a much safer approach.

Index tracking funds can be a good place to start: they provide access to all major investment markets at very low cost. These funds simply follow markets such as the FTSE-100 (the 100 biggest companies in the UK) or the S&P 500 (the 500 biggest companies in the USA).  Buying tracker funds reduces the risk of poor investment decisions. This can help get you comfortable with investment before expanding your horizons.

Before you invest, it can be worth thinking carefully about your investment profile. This can help set parameters for how much risk you’re happy with, and the type of investments you should look at. It is made up of five key factors:

• Your emotional risk response How do you feel about your investing in things which will sometimes fall in value?
• Your understanding of investments and risk Your emotional risk response will be affected by your understanding of your investments and how they will perform.  Do your research so you know what to expect.  Or use a trusted adviser to guide you.
• Your capacity for risk Never invest money (or hang on to investments) that you cannot afford to lose.  Despite the long-term upward trend of stock markets, they can fall significantly when more people are selling than buying.  Even a mainstream index-tracker could lose 40-50% of its value in extreme circumstances.
• Your investment timescales Over a day or a week or a year, prices may go up, down or sideways.  But you will find almost no 10-year periods when mainstream markets have lost money.  An investment which is high risk over the short term, will represent only a moderate risk over the long term.
• What are you trying to achieve?  There is no point in taking more risk than necessary to achieve your objectives. Don’t forget inflation!

A final point: investing is not gambling. It is a sensible way to grow your money ahead of inflation over the longer term, ideally 10+ years.

With the right approach, there need be no sleepless nights and no concerns about a long-term investment strategy. Just remind yourself that you’re in it for the long-term.

All investing carries risk and past performance does not guarantee future results. If in doubt, seek financial advice.

Robin Etherington is a chartered financial planner and managing director at Amber River HDA.

Robin has been an Independent Financial Adviser since 1987 and became a Chartered Financial Planner in 2013. With expertise in investment, retirement and tax planning for individuals, trusts and businesses, he specialises in helping those with complex planning needs to achieve their goals.

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