There's no sugar-coating the fact that investing comes with risk.
But investing is also one of the only ways to keep up with inflation – which lops an average 2.5 per cent off the value of your savings each year.
As a busy professional, it’s unlikely that you have hours to spend sifting through fund factsheets or researching hot stocks in pursuit of the next Tesla or Amazon. Successfully mastering a portfolio of investments takes a lot of time.
But being time-poor shouldn’t prevent you from growing your hard-earned money. Here are some steps to get you started.
Set clear goals
One of the first steps to investing wisely is to clearly define your investment goals. Every investor is different. Age, income, and appetite for risk all need to be taken into consideration.
Your timeframe is a key component of planning your investments. If you are investing for a retirement that is 20 or 25 years away, then you have ample time to ride out the likely ups and downs of the market.
If you are saving to buy a property, or if your child is approaching university age, then you may not have time to recover from a downturn.
Establish a safety net
Before making investments, it’s important to deal with any high interest debt, and build up a decent cash savings buffer. The interest rate you pay on your credit card is likely to be significantly higher than anything you can earn in a savings account.
Building up a cash reserve for unexpected expenses protects you and your family. Keep growing your emergency fund until you have accumulated three to six months of expenses in cash deposits, so you can easily access these.
Develop a healthy habit
Perhaps the greatest benefit of investing regularly is that the money you invest now has longer to grow.
The power of compounding means that every £1 saved today should be worth much more in the long term.
Take advantage of free money
Making a pension contribution is the most tax-efficient way you can save for the future.
For every £1 you pay into a pension, the government pays in at least an extra 25p. And once your money is invested, it can grow free of capital gains and income tax.
Use your ISA allowance
An Isa is a simple way to protect your your savings and investments from tax.
Everyone over the age of 18 can save up to £20,000 each year in an Isa; this can be cash, stocks and shares, or a combination of both.
Using an Isa to hold stock market investments means that there is no capital gains tax to pay when you sell your holdings, and there is no tax to pay on any income you receive.
Don’t be too cautious
Investing money is very different to holding cash in a bank account.
When we make our first investments, we need to get used to the idea that we may lose money.
If you’re overly apprehensive, you can end up with a very cautious portfolio, even though your timeframe may be decades. This is likely to result in significantly lower returns.
When it comes to the underlying content of your portfolio, history suggests that “growth assets” like equities and property generate higher returns than more “defensive” assets, such as bonds. So if your timeframe is long, it usually makes sense to have a high exposure to growth assets.
Don’t time the markets
Most people only start to worry about the direction of markets when there has been a flow of bad news. When we read about it, prices will already have dropped because investors react instantly to known facts.
If you do decide to sell, or defer a purchase, it will only be profitable if you are prepared to buy when the news is even worse. Most investors aren’t that brave, and as a consequence, they miss the market bounce.
If you’ve already used your pension and Isa allowances, you might want to consider venture capital trusts and the enterprise investment scheme.
These tax-efficient investment vehicles are not a suitable option for everyone, but might be appropriate if you are already doing all the things mentioned so far, and have additional funds to invest.
These schemes typically involve investing in mainly small, unlisted qualifying companies in exchange for certain tax reliefs.
While these are generally considered to be higher-risk investments, if you are looking to be tax-efficient, and do not require access to the money in the short-term, they can offer attractive opportunities.
Get some help
Managing money takes time, experience and specialist tools.
To create a portfolio, you need to identify the best funds in each sector, build a portfolio with the right risk profile, keep track of changes at the funds, and rebalance regularly.
You don’t have to do it yourself. If you’re thinking of investing but don’t have the time, consider using a wealth manager.