Investing your first £1,000
Congratulations, you’ve put your first £1,000 aside for investing! You’ve worked hard to save enough beyond cash savings and want to do something meaningful with your money. If you’re fortunate to be in the position to begin investing it can be daunting. Taking a leap into the unknown - especially the financial unknown - can be very risky.
This is the point where people often opt to seek professional financial advice to help kick-start their investing careers. For example, one might consider turning to watchdogs. One might However, such advice comes at a price may be off putting as it may immediately swallow a sizeable chunk of your investment money.
So, in order to help you minimise risks, here is some of our best advice for those looking to invest their first £1,000.
Tip: Before investing, make sure you have paid off your debts and you have an emergency fund for short term funding. Only invest what you can afford to lose.
Why are you investing?
It’s important you know your goals and decide on a clear investment strategy:
- define your goals: are you investing to protect your capital, get some additional income or grow your capital?
- how long are you willing to invest for? Planners recommend to stay invested for the long-term (7 years+),
- how much risk are you ready to take?
It may be worth trying to determine what type of investor you are.
Reap the benefits of interest compounding
We talked about this in our very first Vestpod newsletter - what Einstein used to call it the 8th wonder of the world. The whole beauty of compound interest is that it is “interest on interest”. Ok, you say, so what does this mean in practice?
Please see an example of how annual compounding works on your £1,000 investment:
Annual Average Interest Rate (%) / Number of Years
| 1% | 2% | 5% | 10% | 15% | |
|---|---|---|---|---|---|
| 1 | £1,010 | £1,020 | £1,050 | £1,100 | £1,150 |
| 5 | £1,051 | £1,104 | £1,276 | £1,611 | £2,011 |
| 10 | £1,105 | £1,219 | £1,629 | £2,594 | £4,046 |
| 15 | £1,161 | £1,346 | £2,079 | £4,177 | £8,137 |
| 20 | £1,220 | £1,486 | £2,653 | £6,727 | £16,367 |
| 25 | £1,282 | £1,641 | £3,386 | £10,835 | £32,919 |
So basically, investing £1,000 today for a period of 15 years at an average annual rate of 10% will leave you with £4,177. Wow.
On average, it is worth knowing that the UK stock market has returned about 9% per annum. But average annual 20-year returns during this period can vary, from as low as 3% to as high as 20%.
Where can I invest?
There is a broad variety of assets you can invest in, namely Exchange Traded Funds (ETFs), shares, bonds, funds but also property, commodities and more. However, for beginners, it is useful to focus on ETFs and shares to begin with.
How to hold shares or ETFs?
Today it is easy to buy shares, and the easiest and cheapest way is to do this online via a “share dealing platform”:
- Choose a “share dealing platform” carefully by looking at the different share dealing charges and the services offered (i.e. you can open an account with your bank or other platforms such as Hargreaves Lansdown, Interactive Investor, TD Direct Investing, etc);
- Set up a trading account via your “share dealing platform” and transfer some money on it;
- Once you've done this, you can log into your account and search for the shares you want to buy. You can either choose to buy a quantity of shares, or a value – whichever you choose, you need to have enough money in your dealing account to cover both this and any dealing charges.
- Once you've selected how you want to trade a price will be quoted, once you've accepted the price the shares will then show in your portfolio.
- You can also hold your shares in a stocks & shares ISA or self invested personal pension (SIPP) wrapper.
Shares vs. ETFs
What is the difference between ETFs and shares? The main difference is diversification: ETFs are funds that allow you to track the performance of an index (like the FTSE 100), and by buying shares or units in an ETF, you gain access to an index or market through a single share holding whilst keeping the flexibility and ease of access. It allows you to get exposure and diversification without buying all the shares in an index or market.
Buying ETFs or shares can sound intimidating. If images of the New York stock exchange jump into your head, don’t worry, it’s not quite like that. Buying ETFs or shares is smart and there are different places you can buy and trade them. The most interesting method is to invest your pension or the Stocks and Shares ISA, which allows its users to trade their shares in the most tax efficient manner.
How can I research which shares or ETFs to buy?
- Start by researching what ETFs or shares you want to buy. You might think of products or companies you use in your day-to-day life. These could be energy companies, supermarkets, fashion outlets, transport - literally anything that you find compelling and relevant. But you should also start reading financial publications, like Yahoo Money, the Motley Fool, the Financial Times or Investor Chronicles. It’s important to get clued up.
- For shares: once you have selected a few companies that interest you, visit the company website and check the “investor relations” page. This is where you can get hold of all the public information about the company. It will help you understand the activities of the company and their financial status. You might also consider visiting Companies House which will tell you more about every registered company’s current financial situation e.g. annual turnover. You can also check on your personal brokerage account website for recommendations given by financial analysts.
Please bear in mind that the value of investments can go down as well as up, so you could get back less than you invest. Some ETFs are riskier than others so you could lose some or all of your money. If you’re unsure whether ETFs or any investments are right for you, please seek independent financial advice.
Should I use a robo-advisor?
Robo-advisors (see more on Vestpod) are algorithm-based online investment management tools that allow you to invest your money across various asset classes. Essentially, you decide how much you want to invest and for how long, answer a few questions on a risk profile, transfer the money and the robo-advisor builds a ”customised” investment portfolio for you.
Robo-advisors also offer pensions and ISA investments so check if this is something that would interest you. Robo-advisors are automated services which means that users only pay a fraction of the cost IFA (Institute of Financial Accountants) would usually charge. Investment specialists will determine where your money should be invested, even though the robo-advisor platform will do all the online onboarding work.
As a point of interest, robo-advisors will generally invest your money into ETFs.
Keep an eye on charges
You have to remember that when investing small amounts it is important to maximize the profit and minimize the costs. Always look at the fees! Best approach would be to stay invested in the long-term to avoid trading fees that eat your returns.
Happy investing!
