A beginner’s guide to investing

Why investing matters

Investing has become more important than ever in today’s inflationary climate. Relying on savings accounts is no longer a viable strategy — with UK annual inflation now hovering between 3% and 4%, IG analysis has shown that over the past 26 years, cash ISA savers have earned just one-seventh of the real returns of investors in UK equities. And in most cases, they have lost out in real terms as well.

For example, £10,000 sitting in a savings account earning 0.5% annually while inflation averages 2.5% would lose nearly 40% of its purchasing power in 20 years. By contrast, the same amount invested in a well-diversified portfolio with historical annual returns of 7% to 10% could grow to £40,000 or more.

While past performance is not a guarantee of future results, investing has in the past continually protected wealth and helped to grow it over time. If you start investing at any age, it may help to stay ahead of inflation and build your financial security.

Investing means buying assets including stocks, bonds or Exchange-Traded Funds (ETFs), with the expectation that they will either grow in value or generate income. Unlike saving, which is about trying to preserve money with minimal risk, investing accepts a degree of risk in exchange for potentially higher returns.

When you invest, you become part-owner of companies or other vehicles that generate economic activity. As businesses expand and economies grow, the value of these investments can increase, creating wealth.

It's critical to distinguish between saving and investing. Saving offers stability but weak growth and potentially diminishing purchasing power as inflation continues to devalue currency. Meanwhile, investing involves uncertainty but much greater long-term potential. 

Your investment choices

New investors are often presented with an overwhelming choice of investment products, each with different characteristics and risk profiles.

Many new investors start with ETFs, as they provide diversification through investing in multiple assets in one basket, which makes them popular for beginners seeking exposure to a wide range of companies or sectors. Some investors prefer to invest in single stocks as they prefer to own a piece of a specific company — though individual shares are arguably higher risk with increased research requirements.

Then there’s Real Estate Investment Trusts (REITs), which allow investors to gain exposure to property markets without directly buying physical real estate. REITs typically invest in income-generating properties (like offices or shopping centres) and are required to pay out most of their profits as dividends. Investing in Exchange-Traded Commodities (ETCs) that give you exposure to anything from gold to oil is also a common choice.

For investors unsure where to start, the simplest solution may be a managed portfolio like our IG Smart Portfolio, which offers a hands-off approach and automatically invests and rebalancing your money based on your risk tolerance. It starts at just a 0.50% fee and is capped at £250 per year per account type.

Getting started: accounts, platforms and regular investing

Before getting started, it’s important to build your foundation. This includes creating an emergency fund and paying down any high-interest debt including credit cards.

Once that’s in place, UK investors have two key tax-efficient accounts to choose from, though many invest in both:

• Stocks & Shares ISA — which shelters returns from capital gains tax and dividends tax. You can invest £20,000 from your post-tax income annually. We also pay leading rates of interest on uninvested cash balances
• SIPP — which offers pension-focused investing with significant tax relief on contributions of up to £60,000 from your pre-tax income, although they lock funds until age 55 (rising to 57).

If you fill up these two accounts, you can also open a General Investment Account, which is subject to tax. Your platform choice is also key, because it affects everything from fees to ease of use.

A good platform offers strong investment access, including UK, US, European and emerging markets shares, as well as ETFs, bonds and REITs — we offer over 17,000 global stocks and ETFs across eight exchanges, alongside fee-free share trading for most markets and competitive forex rates at just 0.7%.

Our IG Invest App and longstanding desktop platform both offer an intuitive user experience, that’s beginner-friendly but scalable with experience, sporting advanced tools like Level 2 data and risk management features. We also offer 24/5 support via online chat and dedicated phone lines during office hours.

Managing risk and building a diversified portfolio

All investing involves risk, but understanding the different types can help you manage them effectively. Everyone’s risk tolerance is different, and yours will be based on your personal financial situation, time horizon and emotional comfort levels. It’s important to recognise that investing isn't about eliminating risk, but about taking the right amount of risk.

Wider market risk affects all investments during economic downturns, while company-specific risk relates to the performance of individual businesses. Currency risk can impact the value of overseas investments, while inflation risk can erode the real value of returns, especially from fixed-income products like bonds.

The best defence against these risks is arguably diversification, where you spread your investments across different asset classes, regions, sectors, and company sizes. The data indicates that a diversified portfolio is less likely to suffer dramatic losses and more likely to deliver consistent returns over time.

As noted above, tax efficiency also plays a major role in risk management. Using a combination of your ISA and SIPP allowances significantly improves your long-term returns over a GIA, especially as the compound growth expands much faster.

For beginners, perhaps the most important thing is to accept that periodic market downturns are inevitable. While past performance is not a guarantee of future results, so far history shows that long-term investors have been consistently rewarded for persistence. Ultimately, the most important step is to get started.