How to invest safely

Business Insights

The pandemic has led to a spike in savings, with the Bank of England estimating that from May to November 2020 British households built up an extra £125bn in savings. But with interest rates still stubbornly low - currently at 0.1% - cash savers struggle to grow their savings. As a result, we’ve seen a rise in the number of novice investors, particularly younger people, who have turned to investing to make their money work harder. It’s important that investors understand the risks involved and don’t get swept along into buying high risk investment products. To help, Rob Morgan, Investment Analyst at Charles Stanley Direct shares his top tips on how to invest safely.

1. Is investing right for you?

It’s crucial to assess a number of things before starting your investment journey. This includes considering what your financial circumstances are, risk appetite and investment goals. This is because investments carry some risk and can go down as well as up, so you need to make sure you can afford to invest over the longer term to allow for these fluctuations. There are ways to reduce risk and it can depend on what type of investments you choose to hold. Investing in funds via a platform and starting with simple products, like an index tracking fund or a multi asset fund in a stocks and shares ISA, can be safest places to start.

If you’re unsure whether investing is right for you, or how much to contribute to your investments, it’s best to seek regulated financial advice from someone who can help work on a savings or investment plan.

2. Spread your investments

To help make your investments resilient to any losses, it’s important to have a diversified portfolio – that is, to spread your risk across a range of investments. Putting all your eggs in one basket means you could significantly lose out if that one investment decreases in value, so it’s crucial to think about the risk you are willing to take with your money.

3. Avoid herd mentality

Getting swept up in popular investing trends could potentially be a lot riskier than you originally think. The GameStop saga earlier this year is a prime example of retail investors clubbing together over online forum Reddit to boost the share price of the stock, while the Football Index demonstrated the problems with gamified trading. Both were hugely risky investments and many investors got their fingers burnt because they rushed in without doing their homework first. Before making any investment decision, make sure to stop and think about what you’re investing in and whether it will be beneficial to you in the long term, no matter how many people appear to be taking part. If not, it could end up an expensive mistake.

4. Be aware of scams

There has been a surge in scammers during the Covid-19 pandemic who seek to take advantage of people’s increased financial vulnerability. With a rise in DIY investing, it’s vital that investors take care to research who they’re investing with and that they’re FCA regulated. A lot of investment scams are facilitated online and via social media, and with over two thirds (68%) of UK savers actively managing their own personal financial investments, it means investors need to be more vigilant than ever not to part with their cash if they don’t know who or what they’re being asked to invest in.

5. Identify what is noise and what is genuinely useful information

In an era of 24-hour news feeds and virtually limitless information it can seem overwhelming to get your head around what’s the best thing to do with your investments. No wonder a quarter (26%) of UK savers say they don’t know where to begin when it comes to investing. Remember that having more information doesn’t necessarily make you a better investor, but it’s important to learn to differentiate between what is noise and what is tangible, actionable information. You don’t have to look very far to find a plethora of different data points that can allow you to have a very skewed or one-sided view of the world. Often a major determinant of your investing success is your ability to take in a lot of information and filter out the excess that doesn’t add any value. Identifying a finite number of sources that you trust will help you keep your investments on track.

To support novice investors, Charles Stanley Direct has launched a New to Investing hub, which provides a regular selection of resources including a free guide, articles, tips, and a series of videos following the progress of novice investor, Erica, on how she’s started her investment journey and overcame some of the jargon.

Rob Morgan, Investment Analyst at Charles Stanley Direct