Welcome to module four of Times Money Mentorâ€™s Investing for Beginners course.
If you have made it this far, you should hopefully now feel much more confident about investing than you did at the start of the course. You should have a better idea of why you are putting your money to work this way, know how to open a suitable account on an investment platform and be able to choose the right assets for your own specific needs.
There are five modules in total â€“ with a new one released each week. If you missed the earlier ones, check outÂ module one, module twoÂ and module three now. Each module includes step-by-step tips, a video, a case study of a real investor â€“ plus an interview with a celebrity to find out how they invest.
Donâ€™t miss the final module: sign up to our newsletter to get it straight into your inbox as soon as itâ€™s published. You can also follow us onÂ TwitterÂ andÂ InstagramÂ to find out when module five goes live.
Module 4: Deciding how much â€“ and how often â€“ to invest
In module four, weâ€™ll take a closer look at some of the logistics and practicalities of investing â€“ helping you work out whether you should contribute money regularly to your account or pay in ad-hoc lump sums. We also look at how much you need to be putting away to achieve your financial goals.
Lump sum versus regular investing
Very often itâ€™s our financial circumstances that dictate how we invest. If you have a bit of cash to spare at the end of the month, setting up a regular savings plan and paying a little money in each month may seem the obvious solution.
On the other hand, if you have had a windfall â€“ a work bonus or inheritance, perhaps â€“ or you just have more than the recommended three to six monthsâ€™ worth of salary sloshing around in an easy access savings account for emergencies or other big, perhaps unexpected outgoings, a lump sum payment into an investment account may make most sense for you.
Investing regularly and investing ad-hoc lump sums are very different approaches, though â€“ they carry different levels of risk and often have very different outcomes.Â
The big advantage of investing little and often is that it tends to be lower risk than paying in big lump sums, in the sense that if you bet big on shares in one go, your money will be over-exposed should the stock markets then slide. Drip-feeding can also be more profitable, particularly when the markets are as volatile as they have been this year, because of what is known as pound-cost averaging (explained below).
Take a look at the following example from the investment platform Hargreaves Lansdown. Two new investors have started paying money into the Legal & General UK 100 Index Trust, a passive fund that aims simply to replicate the performance of the FTSE 100 index, which contains the 100 biggest UK-listed companies.
Investor A paid in a lump sum of Â£1,100 at the start of 2020. It has been a turbulent year for the FTSE 100 â€“ it stood at 7,600 points on January 2, plunged as low as 4,990 on the first day of lockdown in March, but had recovered to 6,370 by November 30, which nevertheless was still a long way down on Investor Aâ€™s purchase price. As a result, she has lost money (on paper at least) â€“ and by November the investment has fallen in value to Â£951. Investor B, on the other hand, has drip-fed the same sum of money into the fund, paying in Â£100 at the start of every month. Eleven months on, his investment is worth Â£1,145.
Thatâ€™s a Â£149 loss versus a Â£45 gain.
This difference can be explained by pound-cost averaging. When you invest in a fund, you buy units â€“ but the price of those units varies over time, according to how the fund is performing.Â
If the fund is performing well, the unit price will rise; if itâ€™s performing badly, its value will fall and so too will the price of its units.
Investor A purchased all her units in one go, at the price being levied at that time, and got 442 units in total. However, Investor B has purchased units once a month, paying a different price each time. When prices were down, that Â£100 would have been able to buy him more units than when they were up â€“ and, over the period, he ended up with 532 units.
With Investor B holding more units than Investor A, heâ€™s in a better position to profit when markets rise. So if markets increase by 5% over the next year, then â€“ without making any further contributions â€“ Investor A would have Â£999, close to her original starting position, but Investor B would have Â£1,202.
It has been a rollercoaster of a year for shares because of the impact of the coronavirus â€“ but what if the markets had enjoyed a belter of a year and risen consistently? The story could have been very different. Although both Investor A and B would have enjoyed good returns, Investor A, with the lump-sum approach, would have come out on top.
This is because all of Investor Aâ€™s money has been invested for the whole year and she was able to buy more units than Investor B, who has spread his investment over the year and seen the number of units he was able to buy each month reduce as prices rose.Â
So lump sum investing can be more rewarding in rising markets, but when markets are volatile, regular savers are able to cash in on those downs to buy more units and put them in a better position to profit from a recovery.Â
The psychological benefits of regular investing
Another benefit of investing regularly is that you donâ€™t need lots of money to get started. Many platforms will let you contribute just Â£25 or Â£50 a month.
Likewise, once you have set up your plan and a direct debit to pay the money into your chosen investments, you can stop thinking about it. You know that your money will be drip-fed into the markets over the year, buying more units when prices are down and fewer when they are up.
The risks associated with lump-sum investing also mean there is often a much greater desire to time your bet on the markets for maximum return â€“ something that even professional investors often donâ€™t call correctly when theyâ€™re buying assets that they think will rise in value, or selling because they believe a fall is coming. As shocks such as the coronavirus â€“ and breakthroughs such as the vaccines â€“ have shown, getting these calls right, at just the right moment, can be tough. Â
By drip-feeding your money regularly into the markets, this timing risk is removed too.
What if I have a lump sum I need to invest?
This isnâ€™t to say you shouldnâ€™t invest a lump sum. Even if its value does take a quick hit, if youâ€™ve got at least five years before you will need your money, you should be able to recover your losses and end up with a gain.
Alternatively, if you are worried about investing a large lump sum, you could reduce the risk by breaking it down into smaller chunks and paying that money into an investment account over a longer period. So instead of contributing Â£10,000 in one go, you could pay in Â£1,000 a month for 10 months instead.
If you have a lump sum to put to work but can afford a regular investment too, you could also reduce your risk by looking at a more cautious investment such as a multi-asset fund â€“ holding bonds, say, as well as shares â€“ while channelling a smaller monthly payment into something a bit spicier.Â
How much should I be investing?
Kicking off with Â£25 or Â£50 a month in an investment account â€“ or paying in a small lump sum of, say, Â£1,000 â€“ is a great start.Â As you start to see your money grow, you will feel more motivated to invest more.
However, if you are investing with a specific goal in mind â€“ like your childâ€™s university fees or home renovations â€“ you may need to do a bit more planning to make sure you reach your target.
First, think about how much money you will need and how many years you have to save for it. Then, using an online savings calculator, you can work out how much you need to put by, assuming different rates of return for your investment funds, to achieve your target sum. Have a play around with the Money Advice Serviceâ€™s savings calculator to see how much you might need to save to reach your goal.
Of course, historical returns are no guarantee of future performance. However, you can get a feel for how your chosen funds have performed in different years by looking at the fund factsheets.
It is impossible to accurately predict how much investment growth you will achieve each year, and in the real world you wonâ€™t get the same returns year in, year out. Nonetheless, by having a play with different rates of return, you can at least form a more informed idea of how you much you need to save.
If you donâ€™t think you can afford the required amounts, have a look at our Guide to budgeting to see if you can free up more money to invest. Alternatively, you may need to push back your timescales. Or, if youâ€™ve only invested very cautiously and have plenty of time before you need the money, it may be worth investing some of your money in higher-risk funds to try and boost your returns.
Donâ€™t forget cash
However much you choose to invest, and how, it is also vital that youâ€™ve got some money in an easy access cash account for emergencies. Raiding investments to pay unexpected bills may mean missing out on future growth if markets are rising â€“ and if theyâ€™re falling, it will only crystallise your loss.Â
From pound-cost averaging to compound returns (see module one), the magic of investing goes beyond which fund you invest in â€“ but it takes time to happen and the longer you can leave your money untouched, the better.
The next step
Hopefully, you now feel confident about how to invest â€“ and how much to invest. To give you a bit of inspiration, we spoke to an investor, Jack Jarvis, about how he invests and what his goals are. And we also interviewed reality star Spencer Matthews about his investments â€“ and his tips for beginners.
Jack Jarvis: â€œHow I invest my moneyâ€
Jack Jarvis, a 33-year-old pilot from Bristol, was spurred on to invest after the birth of his baby daughter, Ottilie.
Jack and his wife Carrie, an English teacher, want to be able to help their daughter financially when she is grown up, and in order to do so have opened a junior ISA with the investment platform Hargreaves Lansdown.Â Â
â€œI was originally looking at ordinary savings accounts for her, but with savings rates being so low, a friend suggested investing using a stocks and shares ISA might be better,â€ explains Jack.Â
The couple are now investing Â£25 a month in the ISA for Ottilie, who is now 10 months old. â€œItâ€™s just a round of drinks at the pub, but over 18 years we know it will really rack up. Hopefully, it can go towards a house deposit for her.â€ Assuming investment growth of 4% a year, according to calculations by Hargreaves Lansdown, the money saved for Ottilie will amount to a pot of Â£7,890 by the time of her 18th birthday â€“ the age when holders of a junior ISA can withdraw the money.Â Â
The couple are investing in one fund through the junior ISA: the Aegon Ethical Equity fund. They chose it from a â€œrecommended fund listâ€ and like the idea of investing ethically. The fund has given investors a return of 16% over the past five years.
Jack likes the idea of putting money away for Ottilie on a monthly basis and starting while she is still a baby. â€œI know that once she is older, she will need money from us, and I feel it will be a lot easier for us to save little and often as she grows up, rather than trying to raise big lump sums at the time.â€
He also intends to talk to Ottilie about the savings being set aside for her â€“ to educate her about money management as she gets older. â€œWe hope sheâ€™ll spend it sensibly and maybe even go on to invest it herself.â€
Taking out the junior ISA for Ottilie has also encouraged Jack to set up an investment for his and Carrieâ€™s futures too. Heâ€™s opened a stocks and shares ISA himselfÂ â€“ this time selecting a FTSE 100 tracker fund- and has transferred a portion of his cash savings into it.
â€œIâ€™ve got friends who invest all the time and are constantly moving their money around, but I donâ€™t think like that. I just wanted something simple and straightforward that wouldnâ€™t stress me out.â€
Jack described the process of opening the accounts as â€œridiculously easyâ€, adding: â€œI didnâ€™t know much about investing at all, but it was all so straightforward.â€
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Investing spotlight:Â Spencer Matthews
Spencer Matthews was one of the characters who made the reality show Made in Chelsea a hit on its debut in 2011. The 32-year-old television personality has also appeared in Iâ€™m a Celebrity . . . Get Me Out of Here, Celebrity MasterChef and The Jump, where he met his wife, the Irish model and DJ Vogue Williams.Â
He has now turned his hand to business, founding a diamond jewellery design service, Eden Rocks, and launching low-alcohol brand the Clean Liquor Company (CleanCo) last year.Â
He is also an angel investor, choosing to invest in early-stage growth companies and start-ups through seed enterprise investment schemes (SEISs) and enterprise investment schemes (EISs). These are high-risk funds â€“ but they do offer tax advantages: SEISs allow an individual to invest up to Â£100,000 per tax year in very early-stage companies and receive a 50% tax break in return; EISs allow an individual to invest up to Â£1m per tax year in a medium-sized start-up and get a 30% tax break. Investors in both schemes also benefit from a capital gains tax exemption on any profits that arise from the sale of shares after three years.
While these schemes are not suitable for most people, Spencer talks about what he looks for when choosing to invest and what he thinks are the most interesting â€œideasâ€ at the moment â€“ which could be useful for beginners looking to research and buy shares on the stock market.
What approach do you take to investing?
Iâ€™m an aggressive investor. I look at high-risk investments and high returns. I invest in schemes where you can think in terms of selling up and making your exit after five to ten years.Â
There are so many wonderful ideas out there. I look for ideas that have been done but not done well, or something that appears to not exist but for which Iâ€™m convinced thereâ€™s a market. For example, Iâ€™m providing some of the SEIS funding for a mental-betterment company launching next year called Halen, which will be an online platform/app that enables a user to â€œtrain their mindâ€. Itâ€™s an attempt to redefine therapy â€“ make it more accessible and acceptable.
What companies have you invested in and why?
Last year I invested Â£50,000 in Hoxton Analytics. Itâ€™s a tech firm that measures footfall in London. It aims to develop better bus routes and help commercial property owners and high-street retailers make better business decisions by providing them with accurate insights on their visitors.
I have also invested Â£50,000 in Optalysys, a company that is basically developing light panels to speed up computers. Its optical AI chips will provide previously unseen levels of processing that consume only a fraction of the power of electronic processors. It will be used in consumersâ€™ networks and mobile devices.Â
Oxford Medical Simulation is a company that provides virtual reality medical simulation training. Medical professionals can learn and practise skills without risking lives! Iâ€™ve invested Â£25,000 in this.
Iâ€™ve also invested Â£70,000 in Cheesies, a â€œketo-friendlyâ€ savoury snack. The ketogenic diet is a very low-carb, high-fat diet similar to the Atkins diet. The company is in the same office as CleanCo so Iâ€™ve got to know the founder.
What advice do you have for beginners?
Donâ€™t invest unless willing to lose. When it comes to angel investing, you want the founder of the company you are investing in to be someone who can execute a plan â€“ and someone who has a good team. Remember, you want your investment to be looked after.
Get yourself a good deal â€“ have a discussion if unsure about anything and question valuations. There will be talk of a three to four-year exit but, realistically, plans change and you have to think more like seven to ten years before you will sell. There are no guarantees, so think long-term whatever you invest in.
Investing for Beginners: the next module
You have now reached the end of the penultimate module in this free online investing course. Complete module five, in which we explain how to review your investments and hold your nerve, and you will be ready to get started for real.
Bookmark this page and check back here to take module five when it goes live â€“ or sign up to our newsletter (at the top of this page), and youâ€™ll receive the next module straight into your inbox.
Module 4: Deciding how much â€“ and how often â€“ to invest
Module 5: Staying on track and reviewing your progress
Extra-curricular: Want some tips on investing a large lump sum? Read How to invest Â£10,000