Investing 101: Why you should start investing today, how to do it and where to start?

From the historic heights of the stock market to unprecedented returns in crypto, the world of finance offers plenty of opportunities to multiply your savings and finance your dreams. With the Internet at your fingertips, it would be a shame not to leverage the vast amount of information available. Moreover, in recent years new investing platforms have entered the market, making it as easy as ever for small retail investors to begin their journey. 

Amidst all of this information, it is easy to get overwhelmed and confused. Helping you out, we’ve prepared this Investing 101 guide to provide you with the intuition and insights you need to wisely park your funds. 

Why invest?

If you’re not a money hungry shark who wants to earn from the discrepancies in the market, you still have plenty of incentives to start thinking about putting some money away. According to recent findings in the UK, the average Brit is expected to live another 20 years beyond the current retirement age of 65.

With the current retirement age not changing drastically in the EU and the US, you’re left with a lot less time to make a lot more money, because your retirement becomes even more expensive. In this situation, storing your money in the bank or putting it under the bed may not be the wisest choice as a large part of your savings may be eaten away by inflation. While inflation hasn’t been an issue in the past years, the recent actions taken by the Fed and European regulators provide plenty of reasons for being cautious.

Multiplying funds instead of preserving them

To cultivate your funds, you need to keep an eye on whether your annual portfolio returns are beating the annual inflation rate. Since bank deposits are no longer a cure-all, the logical way to follow is investment. Follow these steps to start getting well-calculated ROIs:

1. Pick an investment wrapper. Investment wrappers are vehicles that bring together several investments with the purpose of reducing the amount of tax payable on any gains and provide the best returns. The UK, for one, offers such popular wrappers as Individual Savings Accounts and Self-Invested Personal Pensions.

2. Define your terms. Two of the key questions you need to answer are: How much am I willing to put away from my salary each month? What is the risk exposure I am willing to endure? Come up with satisfactory answers to these questions and stick to them. In general, the longer your investment horizon, the less risk averse you should be, because the timeframe would eliminate short-term losses.

3. Balance the three whales: savings, investments and trades. From the funds available to you, try to balance your portfolio. Naturally, savings provide the smallest returns, but that is the most stable option. Consider what chunk of your funds you are willing to put away, how much goes into long-term assets and what proportion you’re willing to keep for day-to-day trading.

4. Rebalance. People tend to forget their promises. If you’ve come up with a ratio – stay with it and rebalance your portfolio accordingly. Rebalancing is a process where you reset your holdings after market movements. For example, a portfolio of 50% stocks and 50% bonds might end up with 55% of its value in stocks and 45% in bonds after a few months, if the value of stocks rose and bonds fell. An appropriate rebalance move would be to sell stocks and buy bonds, bringing it back to 50-50.

5. Select your platform. There are numerous investment platforms available. Ask your friends and do your research – there is a right choice for every taste.

More on the wrappers

Check out a few popular wrapper options to consider:

Individual Savings Accounts (ISA) – Profits made from ISAs are not subject to taxation. It is possible to invest up to £20,000 each year. There are various types of ISAs, depending on your goals: Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, Innovation Finance ISAs, Help to Buy ISAs, Junior ISAs. Learn about each individual programme to find the most fitting. 

Pension investments – having exhausted the ISA limit, it is possible to turn to pension investments. You contribute to your pension right from your paycheck, which doesn’t incur any upfront tax. However, when it comes to withdrawing your cash in retirement, you’ll have to pay some levies.

General Investment Account (GIA) – this is the best option if you want to access your money before retirement. Tax-wise, investments within a GIA incur taxes on any returns you receive – i.e. dividends, interest or any capital gains.