A step by step guide to investing
Step 1 - choosing a risk return level
This is an important decision, and our risk explorer can help you understand the balance of risk and reward.
The right choice for you depends on your circumstances. Some things to consider are:
- How long you're investing for. This makes a big difference to the amount of risk. If you might need your money back within the next few years then investing is probably not for you. If you can leave your money away for 5 years or more then there is more time to ride out any short term stock market volatility.
- How much you can afford to lose money. There is always a risk that you'll get back less than you put in and if you really can't afford to lose money then investing is probably not for you. People usually keep at least 3 months' income in accessible savings and pay down any outstanding debts before considering investing.
- What you feel comfortable with. Investing can be a bit worrying, as the value of your investment will go up and down from day-to-day. If you'll find this very stressful then it might be that investing is not for you, even though the longer term returns can be significantly better than on cash savings.
Our risk explorer also includes fictional case studies for people who've invested.
Step 2 - choosing a well diversified and low cost investment
Once you've decided how much risk you're willing to take, diversification and low cost are the next priorities. Our ready made portfolios and comparison tables are created on this basis.
Most independent studies confirm that these are the most important two principles to follow when investing:
- Using diversification to control risk. Diversification means spreading your money over a range of different assets. This enables each individual asset to be a little bit more risky (which is likely to boost returns) whilst still controlling the risk of the portfolio overall.
- Keeping costs low. Investment costs act as a drag on returns and have a significant impact over the long term. Actively managed funds tend to be more expensive than passively managed "tracker" funds and tend to perform worse in the long run as a result. Sometimes it is worth paying for active management, but only if it provides some diversification benefit that cannot be obtained any other way.
These are the principles followed by most large financial services institutions when they invest their money. Two things that almost all independent studies conclude to be a waste of time are attempting to pick "star" fund managers and paying too much attention to past performance.
Step 3 - keeping an eye on your money
Once you've made your investment you shouldn't just forget about it. Our SmarterCare service takes the hassle out of keeping an eye on things.
Most independent financial advisors would recommend reviewing your investment around once a year. The sorts of issues to look out for are:
- Change in risk level. The risk associated with an investment can vary over time. This could be due to market conditions, or as the balance of the portfolio changes over time as some funds perform better than others.
- Change in outlook. The likelihood of an investment delivering in line with expectations can change. For example, if it performs particularly badly or if long term interest rates change significantly. This can affect your broader financial plans if, for example, you were planning on using the proceeds for something specific.
- Better alternatives becoming available. New funds are launched regularly and the market is becoming more competitive and lower cost. If a new fund has been launched with lower charges and better prospects than your existing investments, you don't want to miss out.
Our SmarterCare page provides a more detailed explanation of the sorts of issues to look out for and how our automatic monitoring service helps.