How to choose your first investment – the easy way

Opening a stocks and shares individual savings account (ISA) or a self-invested personal pension (SIPP) is the easy bit.

Once you’ve opened your account, you’ll need to choose where to invest – quite possibly for the first time.

With investment platforms offering access to thousands of options, the choice can be pretty overwhelming, especially if you don’t know where to start, or the economy is looking a bit shaky - as it is now. But, whatever is going on in the markets, choosing investments is only as complicated as you want or allow it to be.

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While there’s nothing stopping you from getting knee-deep in graphs, charts and PE ratios, it’s entirely optional.

It’s possible to be a successful investor without being an expert or committing to hours of research.

Here’s how to do it.

1) Decide what you’re investing for

Before you do anything, you need to know what you’re investing for. It sounds a bit cheesy but you need to identify your goal, whether that’s buying a house, retirement or something else. It doesn’t matter if you’ve not got firm plans, but at the very least think about when you’re likely to need the money. Can you tie it up for five to 10 years, or are you looking much further into the future? Only once you’ve worked this out, can you start to properly think about risk…

2) Risk assessment

Investing invariably involves taking some risk, so it’s important to determine how much you can comfortably take. This can be a pretty personal decision but it shouldn’t be too emotionally driven; the longer you are investing for, the more risk you should be able to take. There will be some volatility, but over a lengthy time frame (typically five years or more) you should be able to ride it out.

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3) Consider asset allocation

This refers to how your portfolio is divvied up – will it be 100% in equities (stocks and shares), or should you balance it out with some bonds (like corporate bonds and gilts that are issued by the government)? 

As a guide, the more you hold in equities, the greater the risk.  But investing 100% of your pot in equities isn’t necessarily too high risk, especially if you’ve got a long investment horizon – there’s plenty of opportunity to diversity your equity holdings too by ensuring your money is spread across a broad range of industries and geographical regions. That way, if one particular holding performs badly, it shouldn’t have too much of an impact on the overall value of your ISA or SIPP. That might sound rather complicated but you don’t need to do the legwork yourself.

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4) Build a balanced portfolio the simple way

Rather than choosing individual shares,it can make more sense to choose collective funds that are run on your behalf. And lots of funds are intended to be “core” holdings – meaning you can choose one investment that provides a good level of diversification without the need to invest in lots of different funds to work alongside each other.

This could include:

• A broad global equities fund: for example, a low-cost exchange traded fund (ETF) that replicates the performance of a specific index or an actively managed option, where decisions are made by a fund manager
• A multi-asset fund: it’s also possible to invest in funds that hold both equities and bonds. The Vanguard LifeStrategy funds, for example, are a low-cost option that offers varying degrees of global stock market exposure – its Vanguard LifeStrategy 20% Eq A Grs Acc equities fund is designed for cautious investors, Vanguard LifeStrategy 60% Equity A Acc equities for balanced investors and Vanguard LifeStrategy 80% Equity A Acc equities for more adventurous investors
• A managed portfolio: another option is a managed fund for your ISA or SIPP. This involves answering a series of questions before being matched to a ready-made portfolio (made up of multiple funds) that suits your needs and appetite for risk. The funds are all chosen and monitored by experts, meaning there’s no decision-making required by you. Find out more about the ii Managed ISA here and the ii Managed SIPP.

5) Get expert tips

Be wary of chasing the next big thing or taking “tips” from well-meaning friends or colleagues. Even if something has served them well, that doesn’t mean it’s right for you, or that impressive performance will continue. Your investment platform, however, should provide plenty of guidance and expert recommendations to help new investors get started. At ii, our Highly Rated Funds tool (launching soon) can help you track down appropriate options for you. Or our Quick-start Funds give you affordable one-stop access for to global markets.

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6) Should you invest a lump sum or invest regularly?

To a certain degree this will depend on whether you have spare income that you want to save, or a lump sum to play with. But if you’re making your first investment and are feeling a bit nervous, it’s also a practical way to control risk.

If you invest a lump sum and markets fall, you could find yourself nursing a loss relatively quickly. But you can avoid that risk by drip-feeding your money into the markets regularly.

That means you expose less of your money to the market in one go and get to take advantage of something called pound cost averaging. This is where you buy shares at a different price each month meaning you pay the “average” price over the course of the year. This helps deliver smoother returns than investing a lump sum and paying the same price for all your shares.

Learn as you go

Investing is a journey, not a race.

The idea is to grow your money gradually, over time. The trade-off for the risk you inevitably take, is that you should get a better return than you would if you left your money in a cash account.

But your success as an investor doesn’t hang on your ability to pin down the “best” investments – a pressure that can either put people off investing or encourage them to pick things that don’t really work within their overall strategy.

It makes much more sense to start your investment journey by picking an investment that offers broad-based exposure to the world’s largest companies - and commit to it – especially if you’re a beginner.

Hold your nerve…

Once you’ve committed to a suitable investment, you need to leave it to do its thing.

Stock market volatility is unavoidable. At some point the value of your investments will drop, but history tells us they should go up again.

That means it’s essential to hold your nerve during periods of volatility. If you sell up, you’ll only crystallise your losses and miss out on the opportunity to cash in on a recovery.

You’ll also interrupt one of the most significant drivers of investment growth: compounding, where the money you make on your investments start earning returns too.

Fund manager Terry Smith famously said that when it comes to timing the market, there are only two types of people - those who can’t do it and those who know they can’t do it.

What will make the biggest difference to your investments is the time you spend in the market, not your attempts to time it.

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…and don’t obsess

Monitoring your investments too frequently may only raise your blood pressure. But it makes sense to check in on them from time to time.

If you’ve chosen an actively managed fund, you’ll want to know that its strategy is paying off and check its performance against the index it’s linked to (for example the FTSE 100 or the S&P 500).

But, if you’ve chosen a passive or index-linked fund, you can afford to be more relaxed.

Nonetheless, it’s still worth keeping check on how your portfolio is doing. It could be the prompt you need to keep you engaged, increase your investments or tweak your strategy a little.