Get your head around investing
Our ‘new to investing’ hub can be a valuable resource if you're starting out. It explains the basics, as well as the risks of investing. It's a great place to start and build up your knowledge.
You can follow Erica’s investment journey through her regular articles and videos, which includes some easy definitions of key terms and some important things to consider:
- When you should start thinking about investing
- Understanding risk
- How the main types of investments – shares and bonds – work
- Diversification – the cornerstone of sensible investing
- How to invest tax efficiently to boost long term returns.
Be an investor, not a speculator
With the proliferation of social media and enforced boredom of lockdowns, it is perhaps inevitable people are looking to inject some excitement into their lives during a difficult and sometimes harrowing time. Speculating in shares, cryptocurrencies or commodities might seem alluring and fun, but it’s a form of gambling rather than investing. Rapid gains can quickly turn to losses, which might be fine for those who can afford to lose their money but certainly isn’t for those who can’t.
In contrast, investing is a measured and long-term process. It still involves taking risk but doing so in a way that minimises and mitigates it to more reliably harness the growth available across global economies and individual companies. The most important factor in investing is time, which is why anything less than five years is considered too short a period. Stock markets sometimes endure downturns lasting several years. Many people’s first experiences of stock markets are speculative before they come to understand that longer term investing tends to win out – a case of tortoise and hare.
Don’t put all your (Easter) eggs in one basket
If you invest too much in one area you are reliant on its fortunes. Diversification can allow you to secure strong long-term returns but without excessive risk and reliance on one or more areas. It’s the process of dividing your investments between different investments, as well as different asset classes, such as shares, bonds, property, cash and others.
Investors often use funds to provide wide-ranging exposure to a market or asset class. For funds investing in shares, a single fund typically offers 50 to 80 holdings – ideal for the investor without the time or inclination to select their own. By holding several funds specialising in different areas, you can build a very diversified portfolio quickly and simply.
Use ‘tax efficient’ allowances
It is important to shield your growing nest egg from the erosive effects of tax. ISAs, or Individual Savings Accounts, are a valuable shield against tax for UK investors. You can currently put away up to £20,000 a year in ISAs, and any income or investment gains are free from income tax or capital gains tax.
ISAs are available either as Cash, which is like having a tax-free bank or building society account, or Stocks & Shares where your money can be invested in a variety of assets in search of higher returns. A Stocks & Shares ISA could deliver a higher return than Cash ISAs over the longer term but there is a risk the value of your investments could fall – especially in the short term.
While ISAs can be accessed at any time, pensions are often a more effective means of investing specifically for retirement owing to the tax relief available on payments into them. Currently, anyone under 75 with relevant UK earnings can receive tax relief when they contribute within the annual allowance to a personal pension such as the Charles Stanley Direct SIPP. 20% is added by HMRC and any further higher or additional rate income tax relief can be reclaimed – a potentially a simple way of reducing your income tax bill for the year.
Get your skates on to use this year’s allowances
Time is running out to use this year’s ISA and pension allowances, which expire if unused on 5th April.
You can make payments into your Charles Stanley Direct ISA or SIPP online using your debit card until midnight on Monday, 5 April. This is via the "Pay Money In" link under the "Manage my money" section of the site on your My Accounts page. We recommend that you don’t leave subscriptions until the last minute in case you encounter a problem making a payment, though.
Read more on ‘last minute’ ISA options.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Five tips on how to build your nest egg this Easter
Read this next
What are IPOs and placings, and how can you invest?See more Insights