Get the basics on investing | Zurich

Get the basics on investing

Investing can be daunting but in reality, it might be more straightforward than you think. We'll take you through the basics of investing so you can consider whether it's right for you.

Step 1 - Think about what you want to achieve and when

Start thinking about what you want to achieve and when you want to achieve it by.

Focusing on when you'll need the money will help you determine whether to save or invest and where you put your money.

Then place each of your goals into one of these categories:

  • The Now

    This is money you're likely to need in the next 12 months such as rainy day money or for a holiday. You'll probably want to take no or little risk with your money and you'll possibly want to be able to access it immediately and easily.


    Where might you save?

    Think about putting your money in a bank or building society savings account or a cash ISA and look out for high interest rates that offer immediate, penalty-free access to your money.

  • Short-term goals (5 years or less)

    Your short-term goals are for the next big purchases you want to save for such as a new car, a holiday of a lifetime, or a wedding. Or you may just want to build a bigger rainy day fund to cover things like house repairs.

    Whatever the reason, you'll probably want to save as risk-free as possible and get immediate, penalty-free access to your money.


    Where might you save?

    You can put your money away in a bank or building society savings account offering a high interest rate and easy, penalty-free access to your money.

    A cash ISA could be a good alternative to a savings account because you can save completely tax-free - you won't have to pay any income tax on the interest you earn.

  • Medium to long-term goals (5 years or more)

    Medium to long-term goals include money you are likely to need in five years' time or more. Rather than 'saving-up money' think of it as 'investing'.

    This could be saving for a deposit for a house, paying your child's university fees or for long-term saving for a comfortable retirement.

    To truly grow your money, you'll need to beat inflation as the effects of inflation can really eat away your savings in real terms. If you're looking to grow your money, you are unlikely to achieve it by saving in a bank or building society account at current interest rates.


    Where might you invest?

    To get the best chance of growing your money, you'll need to be willing to take some risk and to put your money away for a minimum of five years.

    You have the choice of many investment products in the market where you can choose to put your money in such as stocks and shares ISAs, investment accounts and investment bonds. Once you and your adviser decide which product is right for you, you can start thinking about where to invest.

    But, before you decide where to invest your money, it's important to think about how much risk you are willing to take and how much you can afford to lose.


Step 2 - Balancing risk and reward

You have to accept some level of risk when you're saving or investing but how much depends on what you want to achieve and how quickly you want to grow your money.

You also need to think about how much you can afford to lose if your investments go down.

Saving

The big risk with saving in cash is inflation - your cash savings run the risk of not keeping up with rising prices if inflation is higher than the interest you earn on your cash. For example, if inflation is 2.5%, then in 10 years time £10,000 will only buy the same as £7,800 today.

Investing

Investing your money gives you a better chance of beating inflation than saving, but there are other risks you need to think about.

Risk versus reward

When you invest, a good rule of thumb is the more risk you take, the greater the potential for reward but on the flipside, there's a greater chance of losing more (or all) of your money.

Taking less risk means your investments are less likely to achieve high growth, but you're also less likely to lose as much as you would if you'd chosen a riskier investment.

Time's a great healer

Time gives your investment more time to recover if it falls in value. So, if you have a medium to long-term goal you may be prepared to take on more risk for the opportunity of greater reward. But you need to consider how you would cope with losing some or all of your money. You could probably cope with losing your holiday fund but how would you feel about losing your retirement savings?

That's why when your medium to long-term goal is close to being achieved, you should think about taking less risk with your investment as you won't have enough time to recoup your losses.

It's down to you and your financial adviser to find the perfect balance and this will vary depending on how much you have to invest, what stage of life you've reached and what you're trying to achieve.


Step 3 - Think about where to invest

You can invest directly in assets or you can invest in assets through a fund. We'll look firstly at the different types of assets.


Types of assets

There are four main types of assets to choose from and each one works in different ways and carries its own particular risks.

Cash

Money on deposit (e.g. cash in a bank or building society account).

The risk level is much lower than other assets, but so are the potential returns – especially when you consider the effect of inflation.

Bonds and gilts

Loans made to companies or the UK government which pay an agreed rate of interest until a set date.

Gilts are usually less risky than bonds but their potential for returns is lower. Generally, bonds carry more risk, but the potential rewards can be greater than gilts.

Property

Money invested in commercial property that aims to deliver rental income as well as capital growth.

Investing in property carries risk as property values can fluctuate meaning you could lose some or all of your money.

Also, you might not be able to get your hands on your money very quickly as the property may have to be sold first to release the cash.

Shares

Stakes in companies (often called equities) where the growth depends on several factors including how well those companies perform.

Different shares carry different risks and also different levels of risk. There's a chance you could lose some or all of your money.

Take a look at each asset class to find out more about their potential for 'risk and return'.

risk v return graph

Accessing assets through funds

You can access funds through an investment product such as a stocks and shares ISA, or an investment account. A fund is a way of pooling money together with other investors. The fund then invests your money in assets – professionally managed by a fund manager. The fund manager decides which type of assets are bought and sold by the fund in line with the fund’s aims.


When you choose a fund think about:

  • What you want your money to achieve.

  • How long you are investing for.

  • What level of investment risk you are willing to take.

Get advice

Unless you have previous experience of investing and you’re confident to make your own decisions, we recommend you speak to a financial adviser before you make any investment decisions – bear in mind, you’ll have to pay for any advice.

Find a financial adviser

We can't give you advice but we can help you find a financial adviser and give you some hints on how to prepare for your first visit:

 

Unbiased logo

If you don't currently have a financial adviser, you can find one near you at: unbiased.co.uk

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Or you can read reviews of financial advisers at: vouchedfor.co.uk

[Zurich is not responsible for the content of external websites]