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If you’re new to investing then it can seem very complex and overwhelming. How exactly do you invest? What do you invest in and how can you protect your capital as it grows? In this article, our Oxford-based financial planning team here at WMM offers this short guide on investing for beginners. If you have any questions or wish to discuss starting your own portfolio, then please get in touch and we’d be happy to help you.
What is investing?
In simple terms, investing involves taking capital (usually cash) and allocating it towards one or more “assets” which you expect to grow in value or provide a return. An asset might be a share in a company, for instance, or a Buy To Let property. It is important to remember that when ‘investing’ you ‘should expect a successful outcome’, and if not, then the proposal is speculative or you are gambling.
What is a portfolio?
In the world of financial planning and investing, a “portfolio” is the name given to your collection of assets and investments. This might include cash savings, equity investments (i.e. stocks), fixed-income assets – such as bonds – and property. The precise balance between these assets will depend on factors such as your investment goals and attitude to investment risk.
What is tax-efficient investing?
Where there is a profit to be made there is usually a government seeking to take a cut of it! This area is where a financial planner can offer immense value, by helping you invest tax-efficiently. As an example, in 2020-21 you might choose to invest up to £20,000 in a Stocks & Shares ISA or realise gains up to the annual Capital Gains Tax allowance. Investing tax-efficiently allows you to generate interest, dividends and capital gains which are not subject to tax, or allows you to keep more of your profits by legitimately reducing the tax loss.
Why not just hold cash?
Interest rates on regular high street bank accounts have been low for many years. It is difficult just to achieve a 1% interest rate, for instance, and this “growth” is often wiped out by inflation (which the Bank of England aims for 2%). To realistically increase your wealth, therefore, you need to consider other assets besides cash, which beat not only inflation but also the costs of investing (more on this below).
What should I invest in?
The answer to this question depends on a range of variables. For instance, if you’re starting out in your career and have a long investment horizon in front of you, then you may be inclined to be more “aggressive” with your choice of investments. This is because you have more time to recoup any losses whilst also benefiting from higher investment growth potential. However, if you’re nearing retirement then your priority might be wealth preservation. Consequently, this may lead you to prioritise “defensive” assets in your portfolio (e.g. cash and government bonds). A financial planner can help you determine the best blend of assets for your portfolio, bearing in mind when and how you eventually wish to spend your investments.
How do I minimise costs?
Investing is not free, like when you hold cash in the bank – there are usually costs involved with managing your investments. If you invest in a mutual fund comprising Western company stocks, for instance, then the fund typically takes a percentage of your investment (e.g. 0.10-2% per year) as a fee. There might be other charges involved as well. This is where financial advice can be really helpful, as they can highlight areas where you can save on needless costs. Exchange-traded funds (ETFs), for instance, are usually “cheaper” than mutual funds since they do not involve regular trades (which are taxes) or employ an expensive fund manager.
Conclusion & invitation
Are you a resident in Oxford looking to develop your investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469