Opening an account online or downloading an investment app has never been so easy. And with inflation eroding the value of cash, it can be difficult to resist. As an investment-lover myself, I completely understand the urge to set up a Stocks and Shares ISA. But before diving in, it’s better to take a moment and consider if it’s really the best move for you. Investing is a serious commitment, which cannot be entered into lightly.
Investments should be held for the long-term (around five years or more). That’s because the value of investments go up and down over time due to movement in the stock market. Holding on to them for a long time gives them a greater chance to grow, but there are no guarantees. If you sell your investments at a time when they’re worth less, you could get back less than you put in.
To make sure you’re in the right mindset and situation for investing, here are six actions to check off beforehand. While this article is intended to be helpful, it is not advice.
1. Pay off “bad debt”
If you have ongoing high-interest debt, investing before it’s paid off could be a false economy. It depends on what kind of debt you have, and whether it’s “good” or “bad”.
“Good debt” is like an investment in yourself, some examples are paying off a student loan or taking out a mortgage. Generally, it’s fine to continue paying these long-term good debts. As long as you can meet your monthly or yearly obligations, this shouldn’t be a reason not to start investing if you can afford to and you feel comfortable.
However, for "bad debt" like credit cards, buy-now-pay-later, or payday loans, it’s almost always a good idea to pay these off before you start investing. Pay close attention to any early repayment fees, as well as the interest rates to make an informed decision.
2. Build a rainy day fund
If you put all of your savings into an investment account, how will you cover the cost of emergency payments? If you lose your job, or your bills increase unexpectedly, you need to be able to survive. Taking money out of an investment account early is a serious decision, as you could get back less than you put in.
A much better plan is to set aside some money in a rainy day fund before investing. The amount depends on your costs and circumstances. Experts recommend saving enough to cover three to six months of living expenses (such as money for mortgage/rent, bills, food, travel, and any other essential monthly outgoings). For the average UK household, this comes to around £2,700 each month, so a rainy day fund would be between £8,100 and £16,200. Retirees who might not be able to rebuild their emergency funds as easily may need closer to one to two years’ worth of outgoings in cash.
3. Figure out your timeframe
Before making any investment decisions, think carefully about how long you want to be invested for. To do this, it can be helpful to think of your financial goals, and what age you want to be when you achieve them. After all, someone who wants to fund a Masters Degree in their 20s will have a very different portfolio from an investor saving for retirement in 40 years.
Investments go up and down in value, so you could always get back less than you put in. Generally speaking, the more time you have, the more risk you can afford to take as there's more time to wait out market fluctuations (although there's no guarantee that this will happen). So, investors who want to invest for more than ten years could probably afford to hold more risky assets, like equity. Whereas someone with a shorter timeframe may prefer to opt for less risky assets, like government bonds.
Whatever your timeframe, experts recommend investing for at least five years, across a range of asset classes (including bonds, equity, and cash). If you think you might need access to the money before then, investing may not be the best option for you. You may prefer to explore cash ISAs instead.
4. Check your risk tolerance
How would you feel if your investments suddenly dropped in value? Of course, nobody wants this. But it’s an important question to ask yourself. How you would react is known as your “risk tolerance” and it’s one of the building blocks of your investment strategy.
Overall, your money is always at risk when investing, so research is key in judging what’s right for you. If you’re happy to accept higher risk for the chance of earning higher returns, equities in new and innovative fields could be a good choice. Funds are a way of investing in lots of different companies at once, to spread your impact and your risk.
For example, the Triodos Pioneer Impact Fund invests in small and medium-sized companies which are pioneering the transition to a sustainable economy. Over the past five years, it’s delivered average returns of 9.66% for investors (if it’s held for over five years). But, as part of the trade-off, it comes with a higher risk rating of 4 out of 7.
However, if you’d prefer to tread a little more carefully, less risky assets such as the Triodos Sterling Bond Impact Fund could be a better fit. It invests in corporate, green and social bonds and UK government gilts with the aim of providing a stable income. While the expected annual returns are lower, the risk level decreases too.
5. Opt for tax-efficiency
As well as making money, first-time investors should also think about how to shield any profits from tax. The easiest way to do this is by opting for a tax-efficient investment account. This means keeping more of your money, which can compound and add up over time. One of the best ways is through an Individual Savings Account, or “ISA”.
A Stocks and Shares ISA is known as a tax-wrapper because it shields investments from certain taxes up to £20,000 each tax year. So, over five years, that’s £100,000 worth of investments that could be protected from income tax and capital gains tax. It doesn’t cost any more to invest via a Triodos Stocks & Shares ISA, so these benefits come for free. There are some ISA rules investors will need to be aware of, but overall, it’s an easy and tax-efficient way to make your money work harder.
6. Check your impact
Investing isn’t just about financial gain. It’s also about building the world that you want to live in. You have the choice to put your wealth into a range of companies. So, why not invest in the ones that are making the world a better place?
For thirty years, Triodos Bank has invested in companies that do good for the world. Before you plunge into investing, take a moment to consider what your values are and how you will leave your mark on the planet.
If you want your money to help fix systemic problems of inequality, Triodos Impact funds can support your journey. If you want to invest in companies that are tackling climate change, you can do that too. With services like Triodos, investment analysts will use your shareholder rights to hold businesses accountable and ensure that they stick to their targets.
It’s your money, it’s your impact.