Saving is in crisis. Interest rates are now at a record low and show no sign of improving any time soon.
All major High Street banks are refusing to pay us more than 0.01 per cent on our savings in easy-access accounts.
And yesterday, 25 million of the nation’s savers were clobbered yet again with a round of brutal rate cuts from National Savings and Investments (NS&I).
This guide is aimed at savers who have perhaps always feared the stock market or never really understood how it works, but poor rates mean inflation is eating away at their nest eggs
The rewards offered to savers have been stubbornly poor for more than a decade now. So Money Mail is today publishing a beginner’s guide to investing to help you beat inflation and get the rewards you deserve.
We will talk you through the basics and explain how you can make your money work for you on the stock market.
We will lay out everything you need to know to get started with confidence — demystifying the jargon and providing top tips from investing experts.
This guide is aimed at savers who have perhaps always feared the stock market or never really understood how it works – but miserly savings rates now mean inflation is quickly eating away at their nest eggs.
It is a helpful primer for younger adults, too, who are just starting out and learning financial independence.
Even if you think you know it all, this will serve as a valuable refresher and a timely reminder to check under the bonnet of any existing portfolios.
We hope to show you that investing is nothing to be afraid of — indeed, the real risk could be missing out on the returns investors enjoy and allowing the spending power of your hard-earned money to diminish.
WHAT IS INVESTING?
Investing is buying assets in the hope they will increase in value. Investors profit as their portfolio becomes more valuable and with income payments known as dividends.
Most of us are already investors; anyone saving into a pension has money invested in the stock market.
Investors typically buy shares (also known as stocks and equities) of companies, or a collection of units in a fund which invests in companies.
You can buy shares in any firm publicly listed on a stock market — whether that be the London, New York or Shangahi Stock Exchange, for example.
A stock exchange’s most valuable companies are listed in an index, such as the Financial Times Stock Exchange (FTSE or Footsie) in the UK, the Dow Jones in the U.S., or the Shanghai Composite Index in China.
Listed companies have to publish regular updates on profit forecasts. If a company is doing well, investors will all want a piece and the price goes up. If a company is suffering, the price will fall.
WHERE TO START…
Most beginners start by investing in a fund. A fund is a pool of investors’ money that is used to buy a mix of investments.
Funds are run by managers, or by a computer tracker that follows a particular market index — the FTSE, for example.
Each is designed with a different goal in mind. Some aim to protect your cash at all costs, while others are designed for those happy to take big risks to win big rewards.
Global marketplace: You can buy shares in any firm publicly listed on a stock market – whether that be the London, New York or Shangahi Stock Exchange, for example
Funds are typically a mix of shares, and can focus on a particular type of investment – such as healthcare or technology, or commodities like gold or natural gas. You can also invest in bonds through funds.
These are essentially loans to governments or companies that promise to pay an income at certain points before returning, hopefully in full, the amount invested.
Bonds can be much less volatile than shares, but remember, the higher the reward promised, the higher the risk to your capital.
You can also buy shares in an investment trust. These are funds run as companies listed on the stock exchange.
Savers used to entrust their nest eggs directly to an investment firm or a financial adviser.
But now, by far the most common way to invest is via an investment service such as Hargreaves Lansdown, AJ Bell or Interactive Investor.
These platforms provide a wealth of information about shares and funds, and have customer service teams on hand to help, too.
More than six million people now have money invested with such DIY services.
Tax-efficient Individual Savings Accounts (Isas), launched in 1999, allow you to put £20,000 away every year in either cash or investments without having to pay any tax on the returns you make.
This is in contrast with the personal savings allowance, which lets savers in traditional accounts earn just £1,000 a year in interest without being taxed if they are a basic-rate taxpayer, or £500 if they are a higher-rate taxpayer.
The total value of new investments in stocks and shares Isas shot up 71 per cent between April and June, compared to the previous three months of the year.
You can also invest into a self-invested personal pension (Sipp).
You won’t face income tax on the money you invest into a Sipp, but you won’t be able to touch the money until you are 55.
Another way to invest without facing a tax bill is with a stocks and shares Lifetime Isa.
These accounts pay a government bonus of up to £1,000 a year, but you cannot access the money before you turn 60 without losing the bonus, unless you are buying your first home.
IS IT RIGHT FOR ME?
Investing is a long-term game. If you do not need to touch your savings for at least five to ten years, then it is likely to be worth your while.
Before you start investing, you should make sure your house is in order. Money experts recommend keeping an emergency fund of at least three months of expenses in an easy-access savings account.
The total value of new investments in stocks and shares Isas shot up 71 per cent between April and June, compared to the previous three months of the year
Retirees should aim for around a year’s worth.
And you should invest only what you can afford to. Draw up a budget and work out how much you think you can put away every month. Also ensure any expensive debts are paid off.
Then make a plan of action: how much do you want your money to grow, and over how many years?
If you are young, you can afford to take higher risks as your investments will have plenty of time to recover.
WHAT ABOUT RISK?
Many savers are put off investing because they fear losing all their money overnight.
And it is true, your capital is at risk when investing. But history has shown us that it nearly always beats bank savings in the long run.
With interest rates on savings remaining so stubbornly low, it is now worth considering investing as a way to protect your money from inflation.
Inflation is the rate at which prices for goods and services increase. It dictates how much we can get for our money. But it means your savings need to grow at the same rate, or they will lose value.
Figures from investment broker Hargreaves Lansdown show that £10,000 in the average easy-access savings account will have grown to £10,630 over the past decade. But once you factor in inflation, its real value is now just £8,763.
If the same £10,000 had instead been invested in a fund that tracks the FTSE 100, it would be worth £14,954 — or £12,327 after inflation.
CAN I PLAY IT SAFE?
You can take big risks in investing, or you can choose to play it very safe.
No one can guarantee that you won’t end up with less money than you started with, but the chances of you losing everything overnight are almost non-existent.
A portfolio resilient to major losses will have stakes balanced in a wide range of investments — shares, bonds, property or gold.
The idea is that, when one part falls in value, another rises. Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: ‘When people think about investment, they often assume it’s the same as trading, where you try to time the markets — buy low and sell high.
‘In reality, investment is far less about timing the market and far more about time in the market.
‘The aim is to buy a diverse mix of assets and hold them throughout the short-term ups and downs in order to take advantage of the long-term growth.’
You should approach investing with your eyes wide open.
Be prepared for your investments to fall in value, and do not panic if they do. Be patient and the rewards should come.
But, equally, if you do get frustrated with the performance of a fund or stock, don’t be afraid to move your money.
The key is not to make rash decisions — especially if a share price plummets, because you might well miss out if or when it recovers.
Russ Mould, investment director at AJ Bell, says investors should work out why a stock or index has fallen — and then decide if they should cut their losses and sell.
He adds: ‘Selling after a price plunge can sometimes be the worst thing that you can do. It crystallises the loss and gives you no chance of getting your money back on that investment.’
WHAT DOES IT COST?
Investment platforms charge an annual fee. This is usually less than 0.5 per cent of your portfolio.
You will also be charged every time you buy or sell shares, or buy into a fund or investment trust.
If you invest in a fund, you will also have to pay a fund fee. If it is run by a manager, this will usually be higher than the cost of a tracker fund, which can charge as little as 0.1 per cent, but managers can take around 1 per cent.
You could also face a charge if you move your money out of a fund. This can cost around £25 per fund.
Fees bite into returns, so it’s important to shop around and know what you are signing up to.
Website boringmoney.co.uk is a useful tool for comparing charges by investment platforms, while This is Money’s long-running comprehensive round-up of the best and cheapest DIY investing platforms can help you understand which is right for you.