If you’re thinking about investing, our 10 golden rules of investing will help you manage the risks and maximise the benefits of growing your money.
Before you invest any money, make sure you have an emergency fund saved somewhere you can easily access it (at least 3 months’ worth of expenses).
1. Invest with purpose
The first of our golden rules of investing is that it’s always best to have a goal in mind. Whether that’s to retire comfortably or just to grow your money. And be sure to include a time horizon for each goal. For example, you might want to buy a house within 10 years and save for your children’s future within 30 years.
2. Start early but think long-term
You don’t need to be rich to start investing. In fact, you should consider starting when you can with whatever you can. On Claro you can start with just £10.
The benefit of starting early is that you can take advantage of compound interest, which is when you earn returns on money that was previously earned as interest. This helps to grow your money over time thanks to its ‘snowball’ effect. So the longer you leave your investments, the more they could grow. Remember that investing works best for long-term goals, as the stock market tends to outperform cash over a number of years. So it’s recommended you leave your investments where they are for a minimum of 3 years.
3. Understand your attitude to risk
Before you invest any money, it’s important to consider how much risk you’re willing to take – whether you want to be adventurous or more cautious. Make sure you understand the trade off: usually, the more the potential return on an investment, the higher the risk.
Don’t worry, many platforms will ask you to answer a questionnaire before you invest to identify your risk profile. On Claro, we’ll ask you a few suitability questions to make sure we’re showing you investment options that are appropriate for you.
4. Know the different types of investments
When it comes to investments, you can put your money into pretty much anything these days. The main types of investments are stocks and shares, bonds, commodities, cash and property. As a new investor, it’s likely you’ll invest in a collection of these via funds.
Before you invest in a fund, familiarise yourself with the fund documentation (KID and Factsheets) so you know what types of investments the fund can buy, what the fund is aiming to do, and any risks associated with it.
5. Diversify, diversify, diversify
As with many things in life, don’t put all your eggs in one basket! Putting your money into different investments means that if one doesn’t perform as well as you’d like, hopefully some of the others will make up for any losses you make. This is particularly key if you’re new to investing.
There are many ways to diversify – by number of investments, types of investments, geography of investments, different industries, for example. A popular way to diversify your investments is through funds, so you have exposure to lots of investments and a professional fund manager taking care of these on your behalf.
6. Factor in fees
Different investments come with different fees. How much you pay depends on the type of investment you choose, and there are different types of fees to pay. For example, you might pay a platform fee to the provider you invest through, as well as a fund or investment fee. Investment providers are required to display their fees clearly (they are often presented as percentages) and they must be included in the KID.
When comparing two similar investments, try to keep costs as low as possible so they don’t eat into any profits you make from your investments.
7. Don’t get emotional or panic about losses
It’s vital to put your emotions aside when investing. If you’re feeling the fear or are hungry for higher returns, you might end up accidentally buying at market tops and selling at market bottoms. So try not to be reactionary when you’re investing and trust that the longer you leave your investments alone, the better they’re likely to perform.
8. Don’t time the market
It’s incredibly difficult to time the market, even for the most experienced investors. One way to avoid this temptation is to follow the pound cost averaging approach. This is when you invest equal amounts of money at regular intervals. It means you’re drip-feeding your cash across different points in the market cycle, helping to smooth out any underlying volatility or market ups and downs.
9. Optimise your ISA allowance and other tax-efficient investments
The last of our golden rules of investing: ISAs and pensions are two easy ways to protect your investments from tax. You can invest up to £20,000 into a stocks and shares ISA (assuming you don’t save or invest any of that allowance into a cash, Lifetime or innovative finance ISA in the same year!) And you can put up to £40,000 into your pension (for the tax year 2020/21). You won’t pay tax on any returns you make on your ISA or pension.
Tax treatment depends on your individual circumstances and may be subject to change in future.
10. Review your investments regularly (but not too often)
Monitoring your investments every so often will help you make sure you’re on track to reach your goals. To make this easier for you, when you invest on Claro, our in-house investment expert will regularly check your portfolio and rebalance it if necessary. Learn how to assess the performance of your investments here.
Remember that when you invest, your capital is at risk.