Since investments typically perform better than cash savings, starting an investment is a great way to make your money work harder for you in the long run
When you first start investing, it can be intimidating. It is simple to feel overpowered by the risk, the variety of options, and the jargon. Isn't it preferable to only use reliable, secure cash?
Simply put, no. Cash is a bad way to increase your wealth over the long run because it hardly keeps up with inflation, even though cash savings accounts and ISAs are less risky in the short term than investing in stocks and shares.
According to AJ Bell's analysis, if £1,000 had been saved into a cash ISA in 1999, it would have grown to £2,016 by the end of 2024. However, inflation isn't taken into account. Due to price increases during that time, £1,000 in 1999 had the same purchasing power as £1,856 today.
Inflation eliminates 84% of the 1,016 increase in cash value.
"With inflation eroding your money's potential spending power, you must ask yourself if saving in cash is a risk itself," writes Terry Tanaka, digital editor for the BFIA, in her book Invest Now: The Simple Guide to Boosting Your Finances.
You would have had 3,300 if you had put that 1,000 into the UK stock market. Taking inflation into account, your wealth would have doubled.
In the short run, stock markets can rise or fall, but in the long run, they typically perform significantly better than cash. They don't carry cash, which virtually guarantees that they will lose money due to inflation.
To make your money work as hard as it can for you in the long run, investing is essential. Pensions are a type of investing; if you have one, your pension will already have you invested in the stock market, but you can increase your wealth for spending before you reach retirement age by making your own investments.
We'll go over some of the common queries from novice investors here, along with tips on how to begin your own investing career.
This article is not meant to be investment advice; rather, it is meant to serve as inspiration and information for novice investors. Before you begin investing, thoroughly research your options on your own and, if possible, consult a financial advisor.
What distinguishes investing from saving?
Long-term wealth growth is achieved through investing, whereas short-term wealth protection is achieved through saving.
Rob Morgan, the chief investment officer at Charles Stanely, states that "investing is for growth, saving is for stability." "The goal of saving is to accumulate a buffer for unforeseen expenses or planned expenditures.
In any case, your savings will be worth at least as much in a year as they are now, which makes cash holdings ideal for this short-term coverage.
When you invest, you take on more short-term risk in exchange for larger long-term returns.
"Time is the essential component," Morgan says. "Investing only becomes reliable over a five- to ten-year horizon, and ideally longer, because the shorter you run the risk, the greater the chance of loss rather than gain."
Your investments will probably outperform inflation in the long run and more than make up for any short-term losses.
The global economy is cyclical; the stock market reflects this cycle, and busts inherently set the stage for the subsequent economic boom. The .-com bust, which lasted for just two and a half years, was the longest stock market downturn in the last century.
This does not imply that all investments are made equally. The location of your financial investments has a significant impact. Fortunately for novice investors, however, some of the most straightforward investments are frequently the most profitable.
Is it better for novices to invest in funds or pick stocks?
An owner of a share of a company is entitled to a portion of the profits made by the business. Technically speaking, "stock" in the context of the stock market refers to all of a company's shares, though the terms are frequently used interchangeably. Equity, which refers to the portion of the business that shareholders own, is another term for stocks and shares.
On the other hand, a fund is a collection of shares (and/or other asset classes). Because funds are more diversified, they typically offer a safer investment option for novices.
You become the owner of X if you purchase a share. Purchasing a fund entitles you to ownership of X, Y, and Z. This diversification lowers the chance that your investment will lose money.
It's challenging to choose individual stocks that will perform well, even for seasoned investors. According to Burton Malkiel's assertion in his book A Random Walk Down Wall Street, which is a must-read for any novice investor, "a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts."
However, a stock market is completely different from a single stock, and in the long run, stock markets typically appreciate more than inflation. It's easy for novice investors to capitalize on this trend with funds that track the stock market.
ETFs and beginner-friendly tracker funds.
The following are some of the different kinds of funds.
Exchange-traded funds (ETFs); closed-ended funds (also known as investment trusts); and open-ended funds. There are benefits and drawbacks to each. For novice investors, however, ETFs are the most straightforward and pertinent option.
A fund that trades on a stock exchange as a single share is known as an exchange-traded fund (ETF). In response to shifts in the value of the assets it tracks, its price fluctuates in real time. Just like stocks, you can purchase and sell it in an ISA for stocks and shares.
ETFs are available for nearly anything, but ETF index funds may be of special interest to novices. Such indexes include the US's SandP 500 and the UK's FTSE 100.
According to Exley, "if you're unsure which companies you want to own, you may want to consider a tracker fund, or an ETF." With these, you can own a tiny stake in, say, each company listed on the FTSE 100.
Since index funds only track an index, there are typically few management fees to pay, making them inexpensive.
The best part is that they typically beat more active stock-picking techniques. Just 33% of actively-managed fundsthat is, funds where the manager chooses when to buy and sell stocks rather than merely following an indexperformed better than a passive alternative, according to AJ Bell's December 2024 Manager versus Machine report.
What is the minimum amount of money required to begin investing?
It's a common misconception that investing requires a large initial investment in order to be profitable.
No minimum amount is worth investing in as long as you have a savings buffer in place.
When people have enough cash saved up for emergencies, they typically consider investing, according to Claire Exley, head of financial advice and guidance at J. P. Digital wealth manager Nutmeg is owned by Morgan.
"That involves having a savings cushion to cover unforeseen expenses, usually three to six months worth of outgoings," says Chris Beauchamp, IG's chief market analyst.
In the next five years, this should cover any major purchases or emergencies you may have.
Reducing any high-interest debt before you begin investing is also worthwhile. Morgan states that bad debt, such as high-interest credit cards, BNPL agreements, or overdrafts, depletes your funds and needs to be settled as soon as possible.
However, after this is established, any extra moneyeven little sums"can build confidence and knowledge, providing the life skills to successfully build wealth over time," Morgan continues.
What is the minimum age requirement to begin investing?
Investing has no upper or lower age restrictions. Since your investments will have more time to compound and generate income, it is best to start as soon as possible. Morgan describes the situation as "like a snowball rolling downhill." "It gets bigger the earlier you start and the longer you let it roll.
However, wise investing can help people who are already retired or close to retirement age.
Instead of investing for themselves, a person in their 80s or 90s might be doing so for their descendants. As a result, investing can begin or continue at any age, according to Morgan.
He goes on to say that an investment strategy should change as one ages.
For instance, younger investors are usually able to focus on long-term growth and take on greater risk. Investors who are older or nearing retirement typically prefer a more cautious strategy.
Where a novice can begin investing.
It's simple to get started with an investment platform if you believe you're ready to begin investing.
Some will provide a range of pre-built portfolios from which you can choose a specific risk profile, typically low, medium, or high. We call these robo-advisers.
Alternately, you can begin investing in the funds, stocks, and trusts of your choosing after opening your stocks and shares ISA with your preferred provider.
Making investing a habit pays off, just like saving money. Exley says, "Investing gradually over time has advantages." If you would rather, you can pay in full or set up a direct debit to deduct a certain amount each month.
A pound can be used to start on many platforms, but others may require a minimum monthly payment or a one-time payment to get started.
Where can I get additional information about investing?
Although we have included links to definitions of terms that may be unclear to novice investors throughout this post, the BFIA's financial glossary offers a more comprehensive list of financial terms and definitions.
For novice investors, some recommended readings are as follows.
The Psychology of Money by Morgan Housel; Burton Malkiel's A Random Walk Down Wall Street; and Terry Tanaka's Invest Now. Continue learning to boost your confidence when investing. Beauchamp says that while "you don't need to become a market expert overnight," knowing the fundamentals will give you more confidence when you first start.
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