I remember the time I made my first investment – it was a combination of fear and excitement all at once! Once it was done, I wondered why I hadn’t done it sooner?!
It’s so easy to fear the unknown when you are a beginner, so below I’ve summarized my top 5 tips for a new investor kicking off their journey.
1. Treat learning about finance like learning a new language
Kicking off your financial education journey is never easy. BUT trust me,
everyone starts from scratch – with no clue and builds their way up. Treat
learning finance like learning a new language – consistency is key.
Once you’ve built your understanding of key terminology used in the investing world and how the financial system works – you’ll see how easy it really is!
2. Life can throw you a curveball any time so security is key
Being prepared for a rainy day is crucial to good financial planning – I’d start by having a decent emergency fund that covers 3-6 months of your expenses. This is key to have before starting your investing journey.
The alternative would be to start investing and then have to sell the investments you’ve bought for cash, in order to be able to use the money for an emergency. This risks you selling your investments for less than you bought it for and hence, making a loss. It would defeat the point of investing.
That is why it is crucial to have an emergency fund you can dip into when needed and only invest money you won’t be needing in the near term (next five years).
3. Have a clear idea of your financial goals
Once you have a decent emergency fund and you’ve spent some time educating yourself on the investing terminology, it is key to have a clear idea of your goals and how much money you would need in order to achieve them.
Another key factor is to decide when you would like to achieve that goal. This would influence the type of investment you would be using.
If your goal is within the next 5 years, you’re best to save the money in a high-interest account as there is a risk that the volatility in the market won’t even out and you may end up with less.
However, if your goal is over 5 years away, chances are the peaks and troughs will even out, and hence, you’re likely to end up benefiting from market growth.
4. Don’t hoard your money in a savings account – INVEST IT!
Now, you may have wondered why not just save all your money and never risk any of it by investing in the market? The answer is INFLATION.
Inflation is real and it reduces the value of your money. Inflation is the increase in costs of goods and services year on year. In other words, your £1 today will buy you more now than it will in a years’ time.
If you save it, you might earn anywhere between 0.01-1.5% (these days it’s less than that!) but with inflation being approximately 2%, your money is probably losing value sitting in a bank account.
However, if you invest it, the market tends to grow between 5-8% on average. With compounding, that could amount to a lot more money than the interest in your bank’s savings account!
5. Build your confidence by diversifying!
It is perfectly normal to fear losing all your hard-earned money. In behavioral finance, it is called ‘loss aversion’.
This is purely stating that you are more likely to prefer avoiding losses compared to wanting to acquire equivalent gains. In other words, the pain of losing is psychologically twice as powerful as the pleasure of gaining. It is a cognitive bias and very much the reason why we delay investing due to the fear of losing money.
Be self-aware and rationalize with yourself as to why you want to invest. It is actually really difficult to lose all your money investing if you invest in diversified financial products.
A prime example is investing in an index tracker fund. For example, a FTSE100 Index fund that tracks the top 100 companies in the London Stock Exchange would be a great place to start. What are the chances all 100 companies will be doing badly at the same time?!
With a little bit of education and starting with a monthly amount you are comfortable with (you can start from as little as £25 these days!), you’re off to a great start!
Good luck with your investing journey!
This article has been written by Prerna. Prerna is a qualified chartered accountant and founder of This Girl Invests. This Girl Invest’s mission is to help reduce the gender investment gap by using education as a tool to empower women to invest and to feel financially confident. Find out more at www.thisgirlinvests.co.uk or join the Ladies Investing ClubFacebook Group.
If you’re new to investing but have been considering it, head to the Invest tab in Emma where you can begin your investment journey! Capital is at risk when investing.