8 investment tips for fitter finances

Looking for investment tips? You’re in the right place. After two decades in a low inflation and interest rate environment, an abrupt change in the economic climate has prompted many UK households to relook at their personal finances so they can keep up with the rising cost of living.

Our research found that more than half of adults (55%) say they are not confident their finances will hold up against rising prices. Placing cash and assets in the stock market can feel complicated, especially for new investors – but don’t let that stop you from joining the race. Follow this simple investment checklist to help get your financial health in shape.

1. Define your investment goals

Do you know what your short term and longer-term goals are? Are you saving for a rainy day, to get on the property ladder, a holiday, or your retirement? Having an idea of what you want to achieve will spur you on to plan your finances and save more. It will also dictate the type of investment product you use, such as a Stocks & Shares ISA, Junior ISA (for a child) or self-invested personal pension.

Consider how much you are going to contribute and how often. Like any other type of investing, you’ll need to think whether you can invest as a lump sum, or will you invest in a series of lump sums or monthly contributions. The most successful investment strategies don’t have to be complex and can involve regular deposits, spread over the long-term. But it’s also about how long you want to wait before accessing your funds.

2. Watch out for the investment gap

An ‘investment gap’ opened up over the last decade between those opting for cash savings and investors putting their money to work in assets. A good starting point is to put aside an ‘emergency fund’ that would cover unforeseen events, which is vital when it comes to building resilience into your personal finance plan. This is usually around six months of income in case of any sudden change in circumstances. But for longer term goals of five years or more, it’s worth considering investing.

Interest rates are still exceptionally low at the moment, and a long way short of rises in the cost of living. Over the long term, having more of your wealth invested rather than in cash can help you preserve the spending power of that money and help you meet your goals.

3. Think about risk

This is usually connected to how long you want to invest for and how much you can afford to contribute. Investing in higher risk shares should be taken over the longer-term. If you’re looking for short term investment tips (e.g. 5-10 years), you could use a lower risk option, such as cautious funds. Even shorter than this you should stick with cash.

Remember, you should have paid off expensive debt and built an appropriate rainy day fund (say, six months’ expenditure) before investing.

4. Make the most of tax-efficient savings

Saving, particularly for your pension, may not be something you are thinking about right now, but if you don’t you could be missing out. Most people can receive extra money every time they pay into their pension pot through tax relief, and with workplace pensions your employer makes a valuable contribution too.

Taking advantage of the tax benefits of a stocks and shares ISA by using as much of your £20,000 allowance as possible can also make a difference and offer more attractive returns than a regular cash savings account over the long term.

5. Ensure your portfolio is diversified

Diversifying – spreading your money between different investments and asset classes – is one of the key investment goals for beginners and experts alike, purely for the reason it can lead to a less bumpy ride. If one of the investments is performing poorly, another one could be making up for it.

Always ensure your portfolio is built of various assets so it is not overly reliant on any one area performing well, particularly if you are anticipating volatility ahead. It’s usually too late to rearrange in the midst of market-moving news.

Portfolios can also become out of kilter over time as asset classes rise or fall at different rates. Rapid appreciation in some areas can mean a portfolio becomes imbalanced and riskier by stealth. Methodically, taking some profits and topping up with a little of what has done badly can help keep your portfolio balanced and risk in check.

6. Stay focused on your investment strategy

Financial markets can be volatile, and downs as well as ups are part of investing. Ignoring short-term market ‘noise’ to keep focused on a long-term investment strategy can be hard. But short-term declines should not detract from the potential of riskier assets to help meet longer term goals.

Trying to time the markets means investors must get two important decisions right: when to get out and when to get back in. This means there is a risk of having to pay a higher price to reinvest, and missing out on any dividend or other income in the meantime. Markets are unpredictable and allowing emotions to drive investment decisions rarely serves investors well. While there are no shortcuts, quantitative investment strategies such as compounding (as well as time and patience) can help you iron out maximise returns over the long term.

7. Consider and re-appraise fund choices

Investment choices depend on specific circumstances, goals, attitude to risk and investing time horizon. This will influence how much money is allocated and, if appropriate, how much of this is invested in the stock market.

If you are already investing, it’s worth periodically re-examining your fund choices to ensure they meet your needs and whether you are getting value for money. Fund charges can eat into your investment performance, so the use of low-cost passive funds or ‘trackers’ that aim to follow market indices could help minimise this effect.

Another route is aiming to pick funds with a reasonable chance of long term outperformance. ‘Active’ funds try to beat their benchmarks, though there are no guarantees they will do so and they often come with higher charges than passive funds. Active managers need to justify their higher charges by being sufficiently differentiated from simple, low-cost trackers – usually by holding a significant amount in stocks that are different to the large ones in the index.

8. Get some help or a financial health check if needed

A financial health check is a comprehensive review of your spending habits, income and financial goals you are working towards. A financial planner would help you to understand your options and ways to improve or strengthen your money situation. Each of our One Step Financial Plans provides clarity around a commonly asked financial question.

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