This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Investing can, admittedly, be an intimidating topic for many newcomers. The jargon can be confusing and the volume of information can be overwhelming. Fortunately, learning to invest does not need to be this way. By grasping the essentials of how to build a portfolio, you can empower yourself to make better decisions and build a robust long-term strategy.
Below, our Burnley financial planners offer insight on how to start investing in 2024. We hope you find this useful. Please get in touch for more information or to discuss your own financial plan and portfolio with us.
What is investing and why do it?
Investing is not the same as saving. The latter is primarily about storing value so it is ready when you need it (e.g. a “rainy day fund”). Investing, however, is more concerned with making the value you put away work for you.
In practical terms, this may involve receiving a regular income from your investments via dividends. Another goal of investing is to grow the value of what you have contributed to a portfolio. When you later sell certain investments at a higher price than the original purchase value, you can generate capital gains.
Regardless of which investments you choose, investing usually involves higher risk compared to saving. There is the potential to lose money on an investment which does not work out. Cash savings, by contrast, are typically covered by the Financial Services Compensation Scheme (FSCS) which guarantees an individual’s savings in a UK banking group up to £85,000.
However, cash suffers from a major drawback. It is widely recognised as a poor means for growing long-term wealth. This is because the interest rates from cash savings do not usually beat inflation. Over time, this erodes the spending power of cash savings. By contrast, investing can allow an investor to beat inflation and grow the “real value” of what they are putting away.
Different ways to invest
You may have heard of various “asset classes” which people use to invest. Bonds and equities are the two main ones used by individual investors. Here, many people start to feel lost. Do not worry. Below, we explain how these investments broadly work.
Bonds are similar, in a sense, to bank loans – except you (the investor) are the “lender”. The borrower is a company or a government which promises to repay you by a certain date – with interest. For instance, if you buy a 2-year bond with a nominal value of £100 bond with a 5% annual “coupon” (this is the interest rate), then the company promises to repay your money in 2 years with £5 paid to you each year. The result, for the investor, should be a £10 profit.
Equities usually refer to company shares. If you hold 50% of the equity in a small business, for instance, then you own half of the business and, therefore, typically half of any profits which come in. Investors can own much smaller “slices” of large companies on the stock market by investing in shares. For example, if a big company is selling its shares for £100 each, then you could own 5 shares by spending £500.
You may already see that this would get very expensive if an investor started collecting lots of individual company shares. This is where funds can be helpful. Here, an investor can “pool” their money with other investors to buy lots of shares in many different companies. Instead of buying the company shares directly, an investor can buy a share in the equity fund. A similar approach can be followed with bond funds.
How do I start investing?
Hopefully, you have a broad idea of how bonds and equities work. Yet which ones should you include in your portfolio? Where do you even buy investments? At this point, it can help to work with a financial adviser. A lot of variables go into building a strong portfolio and even seasoned investors often need a lot of help managing their investments.
At least three considerations need to be factored into starting an investment portfolio – your investment goals, your time horizon and your attitude to risk. In other words, what do you want your portfolio to “do” (or achieve)? How long until you will need the money and how much volatility (e.g. price movement in your shares) are you comfortable with?
Working with a financial adviser can help you gain the best answers to these questions and provide expert guidance on other key steps in the investment process. In particular, an adviser can help to narrow down your choice of funds in light of strict criteria (e.g. low investment fees). Moving forward, a professional can be invaluable as a “sounding board” for your concerns when market conditions may worsen and you are unsure how to act. An adviser can help your portfolio to keep on track through periodic meetings, making adjustments (where necessary) so that your set of investments keeps reflecting your goals and strategy.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
