5 year investment plan for a first-time investor

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If you cast your mind five years back to 2020, the pandemic disrupted every aspect of modern life. But amid the chaos of lockdowns, many people encountered something they hadn’t experienced in years: enough time to slow down and consider not only how they want to live their lives, but also how to manage their finances going into the future.

For millions, the absence of commuting, eating out and other lifestyle costs sparked an unexpected financial awakening — with drastic forced spending falls. Simultaneously, the government’s furlough scheme and wider economic stimulus packages provided significant financial support. For context, according to the UK’s Office for National Statistics, households accumulated an astonishing £140 billion in excess savings during the pandemic.

This backdrop contributed to the pandemic eta retail investing boom. People stuck at home with extra cash and limited spending options began exploring investing — and the meme stock frenzy of early 2021 added fuel to the fire, with social media forums popularised the idea of trading as a way to beat Wall Street at its own game.

However, many new investors mistook speculation for strategy. Inexperience with risk, leverage and volatility saw fortunes made and lost in days. The painful lesson for many was that investing is not gambling but a long-term process that rewards discipline, patience and planning.

And for those looking for a way to return to income without active work, long-term investing is one way to potentially make this happen. 

How to invest in shares with us

For those looking invest in UK shares with us, here's a straightforward approach:

1. Learn more about shares
2. Download the IG Invest app or open a share dealing account online
3. Search for your desired share on our app or web platform
4. Choose how many shares you’d like to buy
5. Place your deal and monitor your investment

Investors look to grow their capital through share price returns and dividends - if paid.

But the value of investments can fall as well as rise, past performance is no indicator of future returns, and you could get back less than your original investment.

Starting your five year plan

This plan is not personalised financial advice, and you may wish to consult an independent financial adviser or accountant before making any of your own financial decisions. However, it does help with some common sense tips to begin with.

Arguably, the foundation of any solid investment plan begins with addressing debt. For first-time investors, this means paying off all high-interest unsecured liabilities before considering stock market exposure.

For context, The Money Charity considers that the average UK household credit card debt stands at £2,471, often attracting interest rates in excess of 20%. Very few investments can generate a reliable return anywhere near this level, so clearing these debts represents a guaranteed gain.

Moreover, debt creates financial vulnerability. During market downturns, the risk of needing to liquidate investments at a loss to service interest payments or cover a job loss increases substantially.

Mortgage debt, on the other hand, can often be treated differently. With UK mortgage rates rising over the past few years, overpaying a mortgage has become a more attractive proposition than in the recent past. Most lenders allow borrowers to make additional payments up to 10% annually without penalty — while this does not offer the same long-term returns as stocks, this can be an attractive option — especially where it pushes you into a new loan-to-value bracket.

Building your emergency fund

Before you start investing, it’s common to build an emergency fund. This financial buffer ensures that unexpected expenses (for example a job loss, car repair, vet bill, sickness or similar) doesn’t force you to prematurely sell investments.

The usual target is three to six months’ worth of essential expenses. Given the UK’s current cost-of-living crisis, including record energy prices and rising mortgage costs, aiming towards the latter end of six months is possibly a more sensible benchmark. There is now more geopolitical and economic instability than there has been in recent years, making this step more important than it perhaps used to be.

Keeping your emergency fund in an easy-access savings account or Cash ISA is often the best approach. You might want to consider keeping this capital in short-term liquid investments, as early withdrawals on long-term ventures could potentially lock in losses and undo years of effort.

Maximising government support

Once you’re in a financially stable situation — which might take a year or so — the next step is to take advantage of the various government-supported investment schemes.

Workplace pensions are among the most tax-efficient vehicles for building long-term wealth. Contributions are made before tax, reducing your income tax liability,* and most employers match a portion of what you put in. This effectively means you’re receiving free money towards your retirement, which over time, can compound into a sizeable return.

For those without access to a workplace pension or seeking greater flexibility, our Self-Invested Personal Pension (SIPP) allows you to choose your investments while still benefiting from tax relief.

Contributions are topped up by the government based on your income bracket, further boosting your capital. However, pensions come with limited liquidity—you typically cannot access funds until at least age 55, rising to 57 in 2028. This makes them ideal for long-term goals but unsuitable for shorter investment horizons.

Another useful tool is the Lifetime ISA (LISA), available to those aged under 40. You can contribute up to £4,000 annually and receive a 25% government bonus, up to £1,000 per year. These funds can be used to purchase a first home or withdrawn at age 60.

However, early withdrawals for other purposes incur a 25% penalty, meaning you could lose some of your own contributions. The LISA is particularly useful for first-time buyers who plan to purchase within the next five to ten years and want tax-efficient growth with a government boost.

Then consider opening a Stocks and Shares ISA

With debt cleared, a robust emergency fund in place, and pension contributions underway, it may well be the time to start investing in the markets through a Stocks and Shares ISA.

This tax wrapper allows UK residents to invest up to £20,000 per year (including contributions to your LISA) with all capital gains, dividends and interest earned completely tax-free. The advantages are considerable, as the tax efficiency can make a meaningful difference to your portfolio, especially when compounded over decades.

For investing beginners, starting with broad-market Exchange Traded Fund (ETF) is a very common approach. For example, a FTSE 100 ETF provides exposure to the 100 largest UK-listed companies by market capitalisation, many of which pay regular dividends. Meanwhile, an S&P 500 ETF gives access to the largest US firms, including the growth-oriented tech giants.

Together, these two indices provide geographical and sectoral diversification and are widely bought together by new investors building up a passive investment portfolio. Over the next few years, additional exposure to emerging markets, mid-cap stocks or thematic funds can be included to diversify further.

It’s important to remember that timing the market can backfire — and that time in the market has historically been the better plan. Even strong companies like Alphabet or Microsoft can experience steep drawdowns. For example, 2022 saw many big-name stocks lose over 30% in value despite their strong fundamentals.

The common wisdom is to invest consistently and hold through any volatility. Whether markets crash or soar, regular monthly contributions (known as pound-cost averaging) will smooth out entry prices and build long-term investing discipline.

Diversify, Learn, and Stay the Course

By the fifth year of your investment journey, you should have a diversified, tax-efficient portfolio and a strong financial foundation. This is the time to deepen your understanding of the markets, refine your strategy and potentially adjust your risk tolerance as your knowledge base improves.

You might also want to take advantage of free courses, investment books and reputable online content to continue learning — including our very own IG Academy.

But what will remain critical is the principle of diversification. Spreading your investments across asset classes — shares, bonds, property and commodities — could help to reduce the risk of any single event derailing your long-term goals.

For instance, during periods of heightened economic stress, defensive stocks and dividend payers can outperform growth stocks. Gold often holds its value during crises, while cryptocurrency continues to remain volatile. As ever, a well-diversified portfolio doesn't guarantee profit, but many investors argue that it significantly reduces the risk of permanent capital loss.

Finally, it’s critically important to review your portfolio at least once a year. Check your asset allocation, rebalance if necessary and if you can, perhaps try to increase contributions as your income grows. Look out for changing fees both at a platform and a fund level, as excessive charges can eat into your returns.

And if your goals change — for example, you’re planning to buy a home sooner than expected — adjust your investment strategy accordingly.

Five-year plan summed up

• Consider starting by laying the financial groundwork — clearing high-interest debts, building an emergency fund and creating stability before entering the market
• Make use of government incentives such as workplace pensions, Lifetime ISAs and tax-efficient wrappers like Stocks and Shares ISAs to boost long-term returns
• Start with simple, diversified investments like FTSE 100 and S&P 500 ETFs, then gradually expand into other assets as your confidence and knowledge grow
• Invest consistently through regular contributions, avoid timing the market, review your portfolio annually and keep learning to refine your strategy

*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.