How To Start Investing: A Beginners Guide
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Today, I will show you how to start investing. Investing can be a powerful tool for growing wealth and securing your financial future. Investing is crucial whether you’re looking to save for retirement, build an emergency fund, or increase your wealth. You can invest in anything from stocks, bonds, property, art, and even Pokemon cards!
I started investing in the stock market in my early twenties while at university and continue putting away a monthly amount each month. This will grow into a sizeable retirement fund later in life.
In this beginner’s guide on how to start investing, I will explore the fundamentals of investing, including what it is, why you should do it, different investment options, and how to get started on your investment journey.
What Is Investing?
Investing is putting your money to work in various assets or vehicles to earn a return on your investment (ROI). This return can come in the form of capital appreciation (an increase in the value of your investment), income (such as dividends or interest), or a combination of both.
Investing is distinct from saving. When you save money, you typically deposit it in a savings account or similar low-risk, low-return vehicles. While saving is essential for short-term goals and creating an emergency fund, it doesn’t provide the same long-term wealth-building potential as investing.
Investing is one of the easiest ways to make money in your sleep.
Why Should You Invest?
Investing should be a crucial part of your overall financial strategy for several reasons:
1. Wealth Growth
Investing can help your money grow over time through compound returns. Compound returns occur when you earn a return on your initial investment, and then, in subsequent periods, you make a return on your original investment plus the previously earned returns. This compound effect can significantly increase your wealth over time.
The example below shows what a £1,000 investment might look like invested at 7% over five years:
| Year | Investment Balance | Growth in Value | Year End Balance |
|---|---|---|---|
| 1 | £1,000 | £70 | £1,070 |
| 2 | £1,070 | £75 | £1,145 |
| 3 | £1,145 | £80 | £1,225 |
| 4 | £1,225 | £86 | £1,311 |
| 5 | £1,311 | £92 | £1,403 |
2. Beat Inflation
Leaving your money in a low-interest savings account might preserve your capital, but it won’t keep pace with inflation. Inflation erodes the purchasing power of your money over time. Investing can help you outpace inflation, ensuring your money retains its value.
3. Financial Goals
Whether saving for retirement, a home, education, or any other financial goal, investing can help you reach those goals faster and more effectively than saving alone.
4. Diversification
Investing in a variety of assets allows you to spread risk. Diversification can help you reduce the impact of a poor-performing asset on your overall portfolio.
How to Get Started with Investing
Now that you understand the basics of investing, let’s explore how to get started as a beginner:
1. Set Clear Goals
Before you start investing, define your financial goals. Determine what you’re investing for, whether it’s retirement, a down payment on a home, or some other purpose. Having clear goals will help you choose the right investment strategy.
2. Build An Emergency Fund
Before you invest, ensure you have an emergency fund with enough money to cover unexpected expenses, such as medical bills or car repairs. This will prevent you from having to liquidate your investments in a financial crisis.
3. Pay Off High-Interest Debt
Don’t even consider starting to invest if you have high-interest debt. Clear this first, then allocate the money you used to clear debt to investing. The interest on debt can exceed the returns on investments, making it a more cost-effective choice.
4. Create a Budget
Determine how much you can afford to invest regularly. Consistent contributions to your investments are more important than large one-time investments. Smaller monthly contributions can help you smooth out any peaks or troughs in the market over the long term.
According to Statista, the average savings rate in the UK has been around 7.63% over the last decade. Try to invest at least this amount per month. If you are looking at early retirement, the higher you can push this amount, the quicker you can look to retire. For example, if you increase this amount to 25%, you could retire in 25 years, increase it to 50%, and retire within 15 years or less.
5. Choose an Investment Account
Select the type of investment account that suits your needs. Common options include individual brokerage accounts or retirement accounts like ISAs or SIPPs.
6. Educate Yourself
Take the time to learn about the investments you’re interested in. Understand the risks and potential rewards associated with each asset class. I am still learning and continue to read investment books and articles weekly. The education never stops!
7. Diversify Your Portfolio
Avoid putting all your money into a single investment. Diversification can help spread risk and improve your chances of achieving your financial goals.
8. Start Small
You don’t need a large sum of money to begin investing. Many brokerage firms offer no commission or low commission trades, making starting with a small investment easy.
9. Stay Informed and Be Patient
Investing is a long-term endeavour. Be prepared to hold your investments for at least ten years. Stay informed about your assets, but don’t react to short-term market fluctuations. Stay patient and allow your investments time to grow.
10. Consider Professional Advice
If you’re unsure how to start investing, consider seeking advice from a financial advisor. They can help you create an investment strategy tailored to your goals and risk tolerance.
Investment Options for Beginners
Various investment options are available, each with risk and return characteristics. The following are great options for beginners to get started:
Shares/Equities
When you invest in a company’s shares or equities, you become a shareholder and may receive dividends if the company distributes profits. The value of your equity holdings can also appreciate over time. You can purchase stock or shares in any publicly traded company on the stock market. The most common markets for share ownership are the UK and the US. Check out my article on the best apps to start investing in stocks.
Crypto
Digital currencies like Bitcoin and Ethereum have gained popularity as alternative investments. They offer high potential returns but come with significant volatility and risk. I would avoid crypto as a beginner investor unless you fully understand the crypto market and are prepared to lose your full investment. Other investments offer much less risk.
The easiest place to get started with crypto is Coinbase:
Mutual Funds
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Professional fund managers manage them. Examples of mutual funds include:
- Legal & General International Index Trust (C)
- Rathbone Global Opportunities (Class S)
- Vanguard Sterling Short-Term Money Mrkt (Class A)
These are just examples, and there are thousands of mutual funds to choose from, so do your research or contact a financial advisor.
Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds but trade on stock exchanges like individual stocks and shares. They offer diversification that can be more tax-efficient. Some popular examples of ETFs include:
- SPDR S&P 500 ETF Trust (SPY): One of the most popular equity ETFs. It tracks the S&P 500 in the US.
- Invesco QQQ Trust (QQQ): Another popular equity ETF that tracks the Nasdaq 100 index in the US
Other ETFs include:
- ProShares Bitcoin Strategy ETF (BITO): Bitcoin ETF
- Global X Artificial Intelligence & Technology ETF (AIQ): One of the largest dedicated AI funds
There is a long list of ETFs, so do your research.
Real Estate
Investing in real estate can involve buying physical properties, investing in Real Estate Investment Trusts (REITs), or even investing in a property investment fund such as London House Exchange. Investing in REITs or property investment funds offers exposure to the property market without owning properties directly. These are great ways to start property investment with a lower capital outlay.
Passion Investments
Passion investments are any items that you are passionate about. These would include any collectables such as art, trainers/sneakers, Pokemon cards, whisky, wine, watches, etc.
This graphic by Statista based on the Knight Frank Luxury Investment Index shows the 10-year price change of luxury investment types as of 2022. Rare whisky bottles are soaring!
Various platforms allow you to invest in some of these passion investments. Have a look at the following:
- Art: You will need around £100k to start, but using Masterworks you can invest in multi-million dollar works of art by artists like Basquiat, Picasso, Banksy, and more.
- Whisky: These companies allow you to invest in premium cask whiskey. WhiskyInvestDirect.com, WhiskeyInvestmentUK or Whisky & Wealth Club
- Wine: WineInvestment.com or VinX
For trainers/sneakers, watches and other collectables like Pokemon cards, check out Stockx for buying and selling these items.
You can start investing independently without these platforms. Just acquire the items and ensure you store them safely and securely.
Final Thoughts
Investing is crucial in securing your financial future and achieving long-term wealth. As a beginner investor, starting with a clear plan, educating yourself, and choosing investments that align with your goals and risk tolerance is essential. Follow this guide on how to start investing to start your journey towards a wealthier future.
While investing involves risk, with careful planning and a long-term outlook, it can be a powerful tool for building wealth and achieving financial success. Remember, the most important step is to get started – the sooner you begin, the more time your money has to grow. As the saying goes:
“The best time to start investing was yesterday, but the second best is today.”
