A comprehensive guide on how to invest – and where to put your money

Stashing money under your mattress will see its value shrink 10pc a year in real terms – but if you choose to invest in the stock market you might double it in 10 years. 

If the dizzy world of investing causes you to fret, you might think squirrelling away cash into a standard savings account and pocketing the interest payments might be just the ticket. 

But if it’s there too long, inflation will steadily chip away at its value, so while you won’t lose money, your savings will be worth less each year.

So, once you’ve sorted your emergency savings fund to cover unexpected costs, consider investing the money you’re setting aside for your future.

Why invest?

Investing in the stock market offers the chance to beat often pitiful interest rates offered by the high street banks and potentially generate a better return on your money.

Historically, stock market returns outweigh those from holding savings in cash, which means that your money should grow faster in stocks and shares than in a cash account that pays interest. Do it right, and you can even use the stock market to pay yourself a monthly salary.

The numbers are compelling. If you had invested £10,000 into the FTSE All Share index 10 years ago, you would now have a pot worth £17,588, according to analysis by Fidelity International.

If, however, you had invested £10,000 into the average UK savings account over the same period, your cash would have grown to just £10,263.

That same £10,000 invested 20 years ago would now have grown to £48,418, compared with just £11,471 from a savings account.

Ed Monk of Fidelity International, said: “On the face of it, cash saving looks more attractive now than it has for years. But it’s important to understand that your money will lose value in real terms if those rates fail to match inflation – which right now remains above 10pc. 

“Investing gives you a chance of a return that can beat inflation, especially if you’re willing and able to leave your money invested for long periods.”

There’s an element of risk with all forms of investing; there are no guarantees of returns, and markets will move up and down. Have a think about your “risk appetite” – ie whether you’re a cautious investor who’d prefer to opt for smaller, less volatile returns, or happy with a more adventurous approach – before going ahead and investing your cash.

The longer your money is invested the greater the chance of you reaching your goals – ideally you should remain invested for at least five years, so your investments have time to ride out those ups and downs and for any losses to recover. 

You can also minimise the effects of market dips by drip-feeding your investments, rather than dropping in a lump sum. This strategy is known as “pound cost averaging”, which essentially means that by drip-feeding you’re buying up assets at different times and therefore different prices, again riding out market boosts and dips.

Ways to invest

Shares

Buying shares in a company directly means you own a slice of that business, and hopefully benefit from its profits – if it makes any. The investment return you earn depends on the success or failure of the company. If dividends are paid you could benefit from those payments annually, but these aren’t guaranteed.

Unless the investment is held within a stocks and shares Isa, the first £1,000 of dividend income is tax-free in 2023/24. This is set to reduce to £500 from April 6 2024.

Funds

Instead of pinning hopes on one or a handful of firms, it’s possible to invest in a fund which offers the opportunity to invest in lots of different stocks. Money is pooled with that of other savers and, in some cases, run by a fund manager who then buys and sells shares on your behalf.

You can create a portfolio that suits you; managers can focus on companies in certain regions – such as the UK, Europe or Asia. There’s also a global option where companies from all over the world will feature. Other managers might stick to certain sectors such as technology, healthcare or electric vehicles. 

Alternatively, there are passive funds, run by computers tracking the moves of the stock market index it follows. These can be trackers or Exchange Traded Funds (ETFs). 

Investment trusts

Investment trusts are another type of fund, though they’re set up and run differently. They can deliver a reliable income to investors – even in times of crisis – because of a unique feature. Up to 15pc of their dividends can be held back during bumper years to keep reserves for any tough times that lie ahead, ensuring investors continue to receive income in any kind of market conditions.

While dividends are never guaranteed, many investment companies have been able to increase payouts over time. One impressive example is the City of London trust which has 56 years of dividend rises under its belt.

Bonds

Bonds are another type of investment. They are a form of IOU – you lend money to a company or government, and it pays you a fixed return, sometimes called a coupon. There are a whole host of different types offering different levels of return – and risk. 

At the most cautious end of the risk scale there are government bonds (from developed countries), which are cautious because it’s unlikely the government would default on its debts. 

At the higher end is emerging market bonds, issued by companies in developing countries where there’s more likely to be volatility because of currency movements, and greater chance of defaulting. 

If you’re interested in bond investment, you could buy bond funds. These invest in a variety of bonds, chosen by a fund manager.

Gold

In times of economic volatility, investing in gold can be a way to bring stability and diversification to your portfolio. The UK’s gold currency is produced by The Royal Mint, including bullion bars and coins. Last year, gold bar investments increased by 33.5pc in 2022, and further rises have been seen this year.

However, the price of gold is volatile, and rising interest rates can spell bad news. Therefore, you need to be careful about when you buy in, and how much exposure you’re comfortable with – whether you’re investing in gold jewellery, gold bullion or gold stock market funds.

Tax-efficient investing

An Isa is a valuable tax wrapper around savings or investments, which shields up to £20,000 deposited each tax year. A stocks and shares Isa allows you to invest in a variety of funds, bonds and individual company shares. 

The big draw is that investment gains are tax-free. There’s no capital gains tax (CGT) or dividend tax on your returns.

You can also save in a personal pension – typically a self-invested personal pension (Sipp), which is relatively simple to manage yourself and comes with a string of tax breaks. 

A pension is a valuable tax wrapper that allows savings to grow tax-free. What’s more, you get tax relief on contributions. 

There is no longer any limit to how much you can save in your pension pots overall – though there’s an annual limit of £60,000 (or 100pc of your salary, whichever is lower).

The trade-off for the great tax breaks is that you can’t touch the cash until age 55 (rising to 57 from 2028). 

If you’re lucky enough to have maxed out your Isa and pension allowances – or you don’t fancy locking any extra money away in a pension – you can open a general investment account and invest in the same way. You just won’t get any tax perks. 

Choose your investment provider

Before you can invest you’ll need to choose an investment platform, where you can open an Isa, Sipp or investment account. 

The largest players in the platform market include Interactive Investor, Fidelity, AJ Bell and Hargreaves Lansdown. There are also lots of smaller firms offering a cheaper, no-frills service, as well as several newer app-based “robo advisors”.

Before deciding, you’ll want to look at the charges for running your account, as fees erode returns.

You’ll pay a platform fee of anything between 0.15pc and 0.45pc of your total savings. When you buy and sell investments there may also be a dealing fee per deal. You’ll also pay for the funds you choose.

Alternatively, there’s a Netflix-style subscription option where you pay a monthly fixed fee, which can include platform fees and trades. 

You’ll need to do some sums to see which is likely to work out as better value, depending on how much money you have to invest and how frequently you plan to buy and sell.

There are plenty of free trading sites such as Freetrade and Trading212, though it’s typically only free for buying direct stocks or ETFs.

Bella Caridade-Ferreira of Comparetheplatform.com said: “It’s crucial to be aware of the fees you’ll be paying on your investments. One investor could pay thousands of pounds more than another for running exactly the same portfolio, as charging structures are so different between platforms. 

“The choice should not be all about price, however. Consider the quality of customer service it offers, the range of investment choices available, as well as how easy the website or app is to use. You should also check out the research support and tools offered to help you make your investment decisions, such as shortlists of funds, news and analysis.”

This article is kept updated with the latest information.