How to start investing: key questions to ask yourself
September 02 2020 - Clim8 Team Investment Academy
Investing in stocks & shares, bonds, funds and commodities can be seen as a smart way to grow your money over time. It can help you achieve your personal goals and give you the financial freedom to tick off lifelong dreams.
In this article we’ll answer the key questions that many people ask before they start investing.
What can I invest in?
There is a wide range of available investments, from businesses to property, cash, commodities and even cryptocurrencies, you can invest in many things. In many cases it is possible to invest directly (i.e. own the physical asset) as well as indirectly (e.g. own shares of a physical asset).
There are a number of ways to invest indirectly too. Here are two of the most common indirect investment types:
- Stocks & shares
You can buy shares in businesses and markets in the hope that their value will increase over time, meaning your investment is worth more than the amount you originally invested.
You can also invest in a fund (a collective investment vehicle which “pools” assets), which is made up of a number of assets, whether stocks & shares, property or bonds. This will be looked after by a professional fund manager, who will invest your money usually in one of two ways:
– An ‘active’ fund. This aims to outperform the market by actively selecting stocks and shares and/or other assets.
– A ‘passive’ fund. This kind of fund simply tracks an index and could even be structured as an Exchange Traded Fund (or “ETF” for short).
How long should I invest for?
Investing is a personal journey, so the length of time you hold your investment should depend on your own circumstances and what you’re looking to achieve. As a general rule, investments in stocks and shares should be seen as a medium to long term investment. These investments are generally not appropriate to be held over the short term due to the fluctuations in value that can be experienced.
Investing your money for longer periods of time also means your investment may benefit from the compounding effect, which is in short when your investment increases due to interest being earned on accumulated interest. Compounding was described by none other than Albert Einstein and more recently, the legendary investor Warren Buffett as the “8th wonder of the world”.
How much should I invest?
You should only invest from your savings, always making sure that you have enough to fall back on – at least three months of living expenses is generally considered the general rule of thumb. However, you should also consider your assets to debt ratio. Typically, it is best to repay debt before making investments as the interest on debt can be higher than the returns that can be earned by investments.
How much risk should I take?
Every investment carries an element of risk. There are no guarantees and the value of your investment can increase or decrease over time. Investments are not like savings accounts, but at the same time, they are not subject to the same risks of the rate of inflation/cost of living eroding the real value of your money that can occur by simply leaving your money in cash.
Think about risk on a spectrum, from low, to medium, to high. Investments with a lower level of risk typically offer less in returns annually. However they expose investors to a lower level of potential loss than higher risk investments. Higher risk investments often generate higher returns but carry with them higher risk of loss of your initial capital. This is generally viewed as the risk/reward pay off.
Where should I invest my money?
Think carefully about the types of companies and industries that you want to support. Do you want them to have a social conscience? Do you care if they are a force for positive change in the world? And from an economic perspective, are these businesses likely to grow in coming years or die out as industries focus on becoming sustainable? You should also consider diversification (i.e. different assets, geographies, etc) when considering where to invest your money.
One aspect to think about is that with society more aware of its responsibilities than ever, and the impact of environmental, social and governance issues on the environment, long term sustainable investing is becoming an increasingly important consideration.
What is the investing process?
You can breeze through the onboarding process with the Clim8 app in just a couple of minutes, choosing your risk profile and how much you want to invest. Lots of people start investing by making use of some or all of their £20,000 stocks & shares ISA allowance. This allowance currently means you won’t pay tax on any profits earned from investments.
Before making your first investment, it’s important that you have a basic understanding of these questions, which we hope will put you in a strong position to start thinking about investing with confidence.
Clim8 Invest is a simple way to invest in a sustainable portfolio of carefully selected companies already making a positive impact on climate change.
Investments of this nature carry risks to your capital. Investing in private equity involves a high degree of risk. Please invest aware. Please note this information is for illustrative purposes only and it must not be construed as investment advice.