Six things to do before you start investing

Capital at risk. The value of your investments can go up and down, and you may get back less than you invest.

From the outside, setting off on your investment journey can seem daunting. That’s often because a lot of it sounds like a foreign language or feels outside your control. Thankfully, as everyone has their own personal wants and needs in investing, the whole thing starts with you and decisions you can make to put you on the right path.

Here are a few key steps to take before you begin investing:

1. Pay off debt
2. Create an emergency fund
3. Set your goals
4. DIY where you can, think about advice if it’s complicated
5. Make investing a healthy habit
6. Keep an eye on fees

Fair warning: you’ll hear a lot about the wondrous power of compound interest throughout your investment life, and for good reason. Creating that snowball effect of earning interest on interest is the basis of all good long-term investing. Critically, it’s also an incredibly damaging thing to fight against if your debts are creating more debt the longer you leave them.

Before you begin investing, it’s a good idea to pay off any loans with high interest rates first. There’s no point trying to grow your money in one pot if debts are shackling you in another. Returns are never guaranteed when you invest and the journey is never smooth, so don’t depend on investment performance to offset things like credit card bills - it’s better to focus on paying these off first.

Picture the scene: you’ve paid off those annoying loans and are putting your money to work in the stock market, then the car breaks down. Not only that but that thing in the garden now looks scarily like Japanese knotweed and your best friend’s destination wedding invitation just arrived.

It’s suddenly an expensive time and the last thing you want to be doing is pulling money out of the market at short notice - who knows what short-term influence might be weighing on the value of those shares? That’s why it’s important to set up a cash buffer to cover near-term expenses before you begin.

Most guides suggest between three and six months’ earnings but it’s really about what you think is a sensible amount to have on the sidelines in case of emergency, given your own bills and personal situation.

Whether it’s funding a relaxing retirement lifestyle, home-buying plans or simply trying to beat the cash-drag of inflation, setting your own investment goals will help figure out how much you need to put away, for how long and in which types of assets.

Really think about how comfortable you are with the natural ups and downs that come with investing, and whether you’d be OK with a rough ride in search of higher gains, or if a smoother journey is top priority.

Putting that all together may mean you get a clearer idea of how you need to think about the journey as a whole. For example, if you have an ambitious goal it may mean you need to compromise by putting more money in to begin with, lengthening your time horizon or upping the risk you’re willing to take. If you find your goal is more than manageable, it may be that you can afford to choose lower-risk assets, reduce your timeframe or put less pressure on that initial lump-sum value.

The point here is that your personal circumstances come first, with the stocks and shares serving as tools to help you get there. That’s why a share your friend holds may not be suitable for you - because we all have our own paths to tread.

Most people find they can get what they need online, both in terms of learning about investing and the tools to make it happen. Staying up to date with markets and the economy is a smart move too, as you’ll be in a better place to understand how and why your portfolio moves the way it does.

If you start to feel out of your depth though, or you’re facing a particularly difficult situation with the likes of inheritance or estate planning, a financial adviser may be able to help and relieve some of the burden. There will be a fee attached so it might suit to manage what you can first of all, and consider authorised financial advice if it comes to it.

As far as investing sayings go, “Time in the market beats timing the market” is top tier. Whether it’s the first time you’ve heard it or it has been drummed into you over the years, it’s probably one of the most iconic pieces of guidance to keep in mind.

Delving into what it actually means, investing early and giving your money time to grow is the most useful strategy, rather than waiting in cash and trying to consistently pounce on market lows.

There are numerous studies, covering different long-term timeframes, that offer their take on how best to drip feed money into the stock market. A recent one from RBC Global Asset Management makes the case well.

Pitting a perfect market timer against an incredibly unlucky timer, a regular investor and a cash hoarder, unsurprisingly the perfect timer came out on top. However, how easy is that to replicate in real life? How can you tell a falling market is about to turn and head up the page? Can you guarantee you can jump in every time it happens? The theory works but reality is very different.

Now consider the person who doesn’t make any attempt at identifying the ultimate time to invest. Instead they make equal, regular contributions and don’t get flustered by the highs or the lows. Over the same period they would have lagged our perfect performer by a mere 7.5%.

We might have expected that difference to be greater but the small gap can be explained by the value of dividend compounding, which our regular investor would have achieved and built up at the expense of landing on the absolute best entry points. Time really is your friend here.

Given the latter strategy is less intensive, much more practical and saves us from the panic or excitement of one-off contributions, it’s not a bad one to base your long-term strategy on.

Avoid the pull of always trying to get the ‘best’ price every time - your money is much more useful in the market than waiting on the sidelines.

The UK is obsessed with house prices. We are drawn to estate agent windows like moths to a flame but anyone who has ever bought a house knows the deluge of hidden fees that a headline price masks. Solicitors, surveys, removal vans, stamp duty - the list of people with their palms open is depressingly long.

Investing can rack up fees in a similar way, if you aren’t careful. Commissions on placing a trade, monthly charges from your investment platform provider, fund manager fees - it can all put your money on the back foot before it has even had the chance to grow.

See more: Robinhood’s pricing fee schedule

We naturally want the lowest fees possible, so our investment performance over the long-term isn’t stunted by ongoing charges. But, our attention should be on the value we get for the money we pay rather than an out-and-out attack on any charges we come across.

See more: How much does it cost to trade on Robinhood?

Paying high trading fees can feel a bit pointless when there are cheaper options out there. Conversely, paying for an investment manager to navigate the markets on your behalf may feel worth it to you. Remember too, the costs of an investment platform might include services you have no intention of ever using, a bit like joining a gym and never visiting the pool. There’s no one right answer but know what you’re paying for and always try to make sure it’s adding value rather than just chipping away at your account.

Source:

RBC: Time in the market vs timing the market

Important information

When you invest your capital is at risk. Past performance is not a reliable guide to future gains. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.

This article is meant for educational purposes only. Make sure to do your own research on what investments are right for you before investing or consider seeking expert advice.

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