The term ‘investing’ can be confusing. It often gets mixed up with all sorts of complicated jargon.
But investing is really quite simple. It means being sensible with your money whilst planning for your future so that you have the best chance of achieving your long term goals.
You might be planning for a life event many years from now. For example, long term goals may be getting married or growing a pension to fund your retirement. Medium terms goals could be saving for a car or a holiday. Investing isn’t about getting rich quick or gambling. It’s about the steady accumulation of wealth over the years so that you and your family are secure.
Whatever your goals, and however long term they might be, you stand a better chance of achieving them if you start by following our simple investment tips.
Start small… But start
It doesn’t matter if you have £100 or £100,000, there is no amount too small to invest. And it doesn’t matter if you haven’t started, as there’s no better time to start than today.
The amount you set aside is far less important than getting into a regular habit. It can be as little as £10 a month, which you can simply invest into a low-cost tracker fund. You’d be amazed at the return even a small amount can generate over the long term.
Remember this… If you invested £100 per month into a FTSE 100 tracker fund that returned 5% a year (after inflation) 30 years ago, you would have about £88,000 today
Understand compound interest
Einstein said compound interest was, “the most powerful force in the universe.” And he was a man who knew quite a bit about the universe. To explain its power, let’s look at an example:
You invest £100 in a stock. In year 1, it returns 10% or £10. You now have your £100 principal plus £10 profit. So you have a total of £110.
If you reinvest all £110, rather than withdrawing the £10 profit, you have a larger principal than at the start. So if the stock returns 10% in year 2, you’ll earn £11 profit.
The trick is to reinvest your returns (e.g. interest, dividends or capital growth) to harness the magical power of compounding. If you do, your money will grow steadily over time and give you the best chance of accumulating a savings pot that you can access as and when required.
Make a plan… and stick to it
Whether studying for an exam or training for a marathon, if you have a plan you are far more likely to achieve your long term goals. So, even if it’s basic, plan how you’re going to invest.
The most effective and the simplest plan when you begin is to invest a certain amount of money each week or month. If you commit to that plan as a basic investment structure, you will build an investment portfolio over the long term.
Life throws all sorts of unexpected events at us. But if you make and then do everything you can to stick your investment plan, financial headaches of the future will be lessened.
Be tax efficient
To protect any gains, invest tax-efficiently. And that’s easy to do with an ISA or a pension. An ISA (individual savings account) means that the returns that you make will be tax free. Pensions are also treated to tax relief.
As your wealth grows, speak to an accountant or financial adviser about becoming even more tax efficient. For now, as you’re getting started, think about opening a tax efficient account that will protect the returns you make over time. All good online investment platforms will offer them.
If your mother doesn’t understand it, don’t invest in it
A good way to assess any investment is to describe the investment to your mother. If she doesn’t understand it, don’t invest.
The trick to investing for the long term is to use the old US Navy acronym, KISS: Keep It Simple, Sunshine/Stupid. If you’re putting your money into something that your mother doesn’t understand, there’s a high chance it’s too complicated and not a good long term play.
If your mother understands it, it will be a mainstream investment that investors have trusted for years. Hence, it will give you a high chance of seeing long term returns added to your portfolio.
Find out more about investing with WiseAlpha. All factual information true at the time of publishing.
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