In focus: Investing
Even experienced adults can find the idea of investing daunting. We go back to basics and answer some key questions on why you might want to consider investing, and what you need to know to get started
What do Serena Williams, Michael Jordan and the late Kobe Bryant have in common, other than being world-renowned sports stars? They’ve all used investing to grow their wealth1. Jay Z is a big fan, too2, as is Shaquille O'Neal – the basketball legend who reportedly bought not one, not two, but a whopping 155 Five Guys franchises3. That’s a LOT of burgers.
But investing isn’t just for the rich and famous, or even the super experienced. In fact, since the start of the pandemic, young investors have outperformed all other age groups4. Even so, investing can feel intimidating if you don’t know where to start. Here, we answer some questions around investing to help you get to grips with this long-term saving strategy.
What does investing even mean?
Simply put, investing means spending money in the hope of making more money. It’s buying what’s known as assets – meaning a resource that has an economic value, such as a share of ownership in a company – in the hope that they will grow and provide you with gains (also known as returns) over a long period of time. This part is key – investing isn’t a short-term game. It also isn’t just for the very wealthy – investing small amounts regularly can also pay-off long term.
Why would I invest?
As well as working for money by being employed, you can make money work for you. Many experts would say that investing offers real earning power. While there are of course risks, the UK stock market – we’ll explain what this means later! – has on average returned 7.8% over the last 35 years (1984-2019)5. This means that smart investing could potentially allow you to beat inflation, which is the general rise in the price of goods and services like housing, clothing, food, recreation and transport. That’s almost impossible to do with a general savings account.
Are there ever reasons not to invest?
While investing could help make your money work for you, and hopefully grow, it isn’t the right answer for everyone. For instance, if you are likely to need to access your money in the short-term – that could be anywhere up to three years – or if you have debts that you need to pay off. Equally, if you’re only earning enough to pay for your bills and essentials, it might be better to wait and invest when you have more spare income in case of emergencies.
Are there different ways that I can invest?
Yes – lots. But the most common assets that people buy are stocks and bonds. When you invest in stocks – also known as equities or shares – you are essentially buying a share of ownership in a company (when you hear people talk about ‘the market’, they are referring to the stock market, which is where publicly-owned companies are listed and shares in them can be bought and sold).
A bond, meanwhile, is an agreement to lend money to a company or government for a certain amount of time. You can also invest in property as well as in goods and materials, like gold. Stocks tend to be riskier but offer better returns. Bonds carry less risk but are less likely to make big gains. Whatever you invest in, diversification (investing in more than one stock) is key, because it reduces your risk. More on this shortly.
What do people mean when they talk about risk vs reward?
Risk is the possibility that an investment loses some or all of its value, while reward is the gain that an investment earns over time. When people refer to risk vs reward, they are talking about the fact that, generally speaking, if an investment looks like it could deliver higher returns, then it is a riskier investment, and vice versa. There is, however, no guarantee that you will make more by taking more risk.
What’s the most important thing to remember when it comes to investing?
Again, it’s all about time. Some people try to ‘time the market’, meaning they try to predict the best time to invest in particular shares in order to make as much money as possible. But many investors prefer to focus on ‘time in the market’. In other words, keeping money invested for a long time is more important than which investments you choose and when you buy them. Think of it this way – investing should be like watching paint dry or grass grow. But that doesn’t mean that it’s boring – far from it!
That being said, as explained above, all investing comes with risk, so remember to only ever invest what you can afford to lose, and to invest in a range of stocks to spread your risk. It’s also vital that you check and double-check any sources about potential investment ‘tips’, especially ones being shared on social media. A good rule of thumb is that if it seems too good to be true, it probably is.
It's also worth reading the news and being aware of ‘trending’ stocks that have caused panic recently – such as Gamestop, Reddit and Bitcoin. Remember to be cautious with your investment (this is your hard-earned money, after all!) and don’t put all your eggs in one basket. More about that – better known as diversification – shortly.
How old do I have to be to invest?
In the UK, people under the age of 18 can't hold investment assets in their own name, but there are other ways that you can get started. If you’re under 18, ask a parent or guardian to look into a Junior ISA (Individual Savings Account), with you. ISAs offer tax-free savings, which means you get more for your money.
I’m 18 or over – how do I get started?
Before you invest for the first time, start getting to know the stock markets. Have a look at the information provided by banks or other financial organisations on how and why to invest. You might also want to look into the FTSE 100, pronounced ‘footsie’ 100. It was created in 1992 and is made up of the 100 largest companies listed on the London Stock Exchange, such as Vodafone and Coca Cola. See what is going up and down, and find out why. Do you have a parent, teacher or family friend who invests? Ask them what stocks and shares they hold and what attracted them to them.
Next, think about some companies that interest you – maybe Disney, JD Sports or Sony. Google their share price every week and keep an eye on how they are performing.
Finally, when you’re ready to take the plunge, start small, and think about ‘diversification’ – this means spreading out your investments instead of holding them all in one place, so that if for any reason that stock drops in value, it doesn’t impact all of your money. Many financial organisations offer information on diversified investment products based on your preferred risk tolerance – so if you don’t want to buy individual stocks or manage your investments yourself, they can do it for you.
Lastly, try, if possible, not to check how your shares are performing too often, and don’t worry if you don’t see the growth you were expecting or even a slight dip. Remember – time is your friend when it comes to investing.