5 simple steps to investing

Young male sitting on entry steps to a building typing on his laptop and reading about simple steps to investing. His green bike and helmet are balanced on the steps beside him.

Investing

Gareth Trainor

25th May 2017 at 7:00am

You don’t need to be an investment expert, or have loads of spare cash, to give your money the potential to grow.

Investing means you put your money directly into investments such as stocks and shares or bonds, or indirectly through funds, with the aim of growing the value of your money.

There’s greater potential for your money to grow in value than if you put it in a bank or building society account, although there’s also greater risk of it falling in value. You can read more about saving and investing here.

Many people are understandably intimidated by complicated investment jargon, or news headlines about market crashes. But here are some simple steps you can take to set you on the road to successful investing.

Step 1

You can achieve growth even with small, regular amounts

Investing even a small amount each month can quickly snowball. Say you invest £50 a month, any growth you get is added to that £50 and invested too. And the next month, any further growth on both your original amount and the interest is then also added to your investments. The impact slowly magnifies month on month. This means that you could really boost your investments over the long term. This snowball effect is called compounding – to benefit from it, step one is to start small and regular.

Always remember though that there are no guarantees and investments can fall as well as rise in value, and you may get back less than you paid in.

Step 2

You can also boost your growth by reinvesting income from dividends

This is another way to tap into the compounding effect. If you invest directly in investments like shares or bonds, you’ll likely receive dividends or interest.

And if you invest in funds, some of these will allow you to either take any income that’s generated by the underlying investments or to reinvest it. If you don’t need to take an income, it may be worth tapping into this opportunity to increase any growth by reinvesting it. This essentially supercharges your investments – and it’s why step two is to reinvest your dividends.

Getting the investment mix right is a challenge for even the most experienced investor. But there are lots of ready-made diversified funds available to choose from. These are run by investment managers and analysts who use specialist tools to help them decide the best mix of investments to achieve a particular objective.

Step 3

You should do better if you focus on the long term

A sudden market fall can cause people to panic and sell their investments. But this is often the worst thing to do as it locks in your losses.

Remember that it’s normal for markets to regularly rise and fall, but over longer periods they generally rise in value. In fact, when markets fall, and the news is bleak, experienced investors sometimes see that as an opportunity to buy rather than sell.

So if you want to have a better chance of doing well financially, step three is to regain composure, and don’t make long-term decisions based on short-term market movements.

Step 4

You can help reduce risk by diversifying

This simply means investing in lots of different types of investments. And it’s one of the most positive steps you can take as an investor. Different investments tend to behave in different ways – what causes one to fall can cause another to rise. This means if you spread your investments you’re less likely to suffer a significant fall.

And diversification brings a lesser-known added bonus, provided by some Nobel Prize winning mathematics. If you invest in several different types of investment you may get the average return, but you get less than the average risk.

This makes your investments very ‘efficient’. It’s like boosting the ‘miles per gallon’ in your car. With a diversified portfolio, for every unit of risk you take, you can get more units of return back.

So firstly, check that you have a variety of different types of investments (shares, bonds, property) and secondly, that these cover different geographical locations – this will help you achieve step four: to spread your risk. You can read more about why diversification is important when you’re investing here.

Step 5

Know when you need help  

It’s important that you feel comfortable and confident about the investments you already have and those you choose in the future.

It’s worth considering if you have the time and capability to make more involved investment decisions. If you need advice, you can talk to a financial adviser about your goals and get their help to pick the most appropriate investments. Our final step is to know your limitations and to get advice if you need it.

Want to know more?

Do a fact find, like the one from the Money Advice Service, to work out exactly what you want to achieve and how much money you can afford to commit to investing.

Understand how you feel about risk when it comes to investing using our OxfordRisk questionnaire.

Are you in a position to manage your own investments, or would you prefer to outsource this? Our Do-it-Yourself or Delegate Guide can help you to decide.

Find out more about growth on growth and reinvesting dividends to boost your investments over the long term in our “What Einstein tells us – reinvest your income” blog.

Find out how to get the average return of your investments but less than the average risk in our blog on diversification.

If you’re in, or approaching retirement, and you intend to keep your money invested and use it to take an income, you need to think carefully about managing risk as this brings new and more complex risks.

You may want to get advice to help you choose investments that best address these risks and meet your needs. You can find out more in our Make your retirement income last article.

This article and any responses to comments should not be regarded as financial advice and is based on our understanding in May 2017.

A stocks and shares ISA and a pension are investments. The value of investments can go up or down and may be worth less than you paid in. Past performance is not a reliable indicator of future performance.