Important information: the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
We’ve come a long way over the course of the Young Money series. You now know why you should invest, how to do it, and what to look for. We’ve also seen how all that fits into the wider context of a global pandemic, how to ensure you’re investing ethically and sustainably, and how to manage the risk involved.
That’s a lot of ground covered, so here are some key takeaways to bear in mind as you begin to invest for yourself. Remembering these top tips will mean you resist the urge to act rashly, and help keep your investments on track to achieve your long-term financial goals.
1 - Little and often
One of the most effective ways to invest (especially as young people with time on our side) is through a ‘Regular Savings Plan’ (RSP). Setting up an RSP can make that first investment feel less daunting. Instead of taking the plunge with one lump sum payment, you can open an RSP from as little as £50, and drip feed your money over time. Doing so can also reduce the work involved afterwards - once it’s set up, you’re safe in the knowledge that you’re certain to be investing every month.
Another big advantage of RSPs is that they stop you trying to time the market. I’ve spoken before about the dangers involved with trying to buy low and sell high. Firstly, it’s basically impossible to consistently time the markets, since no one can know how they will move in the short-term. Regular savings take out the guess work, by helping you catch market highs as well as lows, meaning your investments should average out over the long run without you having to log in.
Secondly, all the time you spend trying to pick the perfect time to invest is time spent out of the market - time which would otherwise be spent compounding your regular payments. Over the long-term, the latter effect of compounding is likely to be far more beneficial for your savings, even if you could enjoy regular success in timing the market - check out the case of ‘Steady Eddie’ to see how that works in more detail.
2 - Stay informed
A key advantage of an RSP is that it allows you to get on with life while your investments tick along in the background. That doesn’t mean you should totally ignore them though. It’s worth checking up on your account regularly - adjusting your contributions when you feel it’s necessary, reallocating your investments, and so on.
Staying alert doesn’t mean acting rashly though. Chances are, you will log into your account and occasionally see your investments have gone down. When that happens, it’s critical that you do not panic. Keeping your sights set over the long-term is important, and doing so means accepting that short-term hits to your investments are unlikely to derail their longer term prospects.
If you shouldn’t panic when things go wrong, that begs the question - when should you do something? Ultimately, this will come down to you and your best judgement - and your judgement is likely to best when you stay informed. Our Markets and Insights hub page features regular articles written to help investors make sense of their finances. You can also sign up to daily or weekly emails, which help keep you up to date with the news and its impact on your savings.
3 - Think about your pension
Honestly, this is perhaps the most significant financial obstacle we are likely to face over our lifetimes.
Government changes to pensions have shifted the responsibility for funding our retirements away from our employers, and onto us - and our parents’ generation are now starting to realise the weight of that burden. According to a 2019 Fidelity global retirement survey, a mere 22% of 35-54-year olds felt on track to cover all their expenses when they retire.
As difficult as it’s been for our parents, we are now uniquely positioned to learn from their mistakes. There are several ways you can start thinking about your pension now, so that we don’t face the same issues they have.
Firstly, it’s worth ensuring that you’re getting the most out of your workplace pension. Current employer contributions stand at a minimum of 3% with you contributing 5%, but many workplaces will agree to match any additional payments you make up to a certain level. Investigate what benefits your work offers - there’s every chance you’re not making best use of the options available to you.
If you’re self-employed, you won’t have the comfort of a workplace pension, so staying savvy about your savings is perhaps even more important. Fortunately, many of the same rules apply for you as they do everyone else. You’re still entitled to the State Pension (while this won’t be enough to cover you through your whole retirement, it’s worth checking how much you’re entitled to here), and to government tax relief - that means, if you’re a basic-rate taxpayer, for every £100 contribution you make, you only have to pay £80 - the government tops up the extra 20% to bring it up to £100.
Many self-employed people use a SIPP in place of a workplace pension. It offers certain tax benefits and you can invest into it flexibly with regular savings or ad-hoc payments - but, crucially, you won’t be able to withdraw from it until you turn 55.
Thinking about your pension this early on in your career may feel like the lowest of your priorities. That’s why the first part, getting started, is always the hardest - as soon as you set up that initial payment, or sign up to regular investment emails, or review the state of your pension, you’ve done most of the hard work already.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944. Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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