Six questions to find out if you’re ready to invest

Taking the first step into investing is always daunting. While the idea is that your money will grow, there are no guarantees. You are putting your hard-earned cash on the line.

Even after yesterday’s interest rate cut savings rates are still riding high – so you might be tempted to keep your money in cash. However, studies have shown that, over time, your money should grow faster if you invest it.

• Learn with ii: What is a Stocks and Shares ISA? | ISA Investment Ideas | What is a Managed ISA?

According to the Barclays Equity Gilt Study – which analyses data going back to 1899 - in any two-year period there is a 70% chance that shares will outperform cash, rising to over 90% over 10 years.

So, is it time to take stock of your finances and take the plunge into investing? Here are six questions to help you decide.

1) Have you got any debts?

Nobody would ever get around to investing if they waited until they had paid their mortgage off or cleared their student loan. But, if you’ve got any credit card debt or personal loans hanging around your neck, it makes sense to pay those off first. That’s because you’ll likely be paying a higher rate of interest on that borrowing than you’ll earn on your investments.

• The seven deadly sins of ISA investing

It’s particularly important with credit card debts, where APRs are likely to be around 25%. You might be paying less than that, even paying nothing at all if you have a 0% deal. However, you still need to be in a position to pay off the debt before the 0% rate runs out, otherwise you’ll start paying a high level of interest on your borrowing.

2) What will you be investing for?

You also need to think about what you are investing for and when you’ll need the money. If you are saving for something like a house, wedding or holiday and will need the money in the relatively near future, it makes sense to keep it in a cash account, just be sure to get the best rate possible and watch out for tax.

• Five ISA lessons that nobody taught you at school

However, if this is money that you are earmarking for a more distant goal – be it retirement or just your future financial security – investing will likely make more sense. While the value of your investment will invariably drop at some stage, you should be able to ride out that volatility and recoup any losses over time.

As a guide, it’s normally recommended that you should only invest money that you won’t need to touch for at least five years.

3) Do you have enough cash in the bank?

In addition to keeping money you might be saving for a house deposit or a holiday in a cash account, you also need an easily accessible rainy-day fund.  This will mean you won’t need to compromise achieving other financial goals if you face an unexpected expense – from car repairs to a period of unemployment.

Typically, experts recommend keeping three to six months’ income in an instant access savings account.

4) Where will you invest?

There’s no end to the choice of investment options available, but your choice should be based on its ability to deliver your investment goals, first and foremost.

In 2021, the Financial Conduct Authority (FCA) expressed its concerns about the number of younger investors investing in high-risk products such as foreign exchange and cryptocurrencies. Very often, it warned, investors’ decisions were fuelled by the thrill of investing, social status and the sense of ownership that investing gave them, rather than more practical reasons – such as saving for retirement or a desire to make their money work harder.

Its research found that 38% of investors surveyed did not mention one functional reason for investing in their top three.

Cryptocurrencies and individual shareholdings can be high risk for new investors. It makes more sense to strive for consistent and reliable returns by investing in a broad basket of shares using a diversified fund or exchange-traded fund (ETF).

• My first five years as an ISA investor

Diversified global funds, with a spread of companies across the world can be a good start for new investors. Alternatively, you can choose funds that invest some money in bonds as well as equities to manage your risk. Both examples can be good core holdings for investors who only want to invest in one fund.

They might not offer the same thrill as a crypto purchase or a more speculative shareholding, but will likely do a better job of increasing your wealth.

If you don’t feel confident enough to make your own investment decisions, then something like interactive investor’s Managed ISA (individual savings account) can help. It has all the tax-free benefits of our Stocks and Shares ISA, but with our experts choosing the investments for you. It enables you to start investing quickly and easily in a way that suits you.

5) What will your investments cost you?

When you start investing, you’ll need to understand the costs. If they aren’t kept in check, they can take a significant slice out of your returns.

There are three main costs you need to consider: fees for the platform you use, charges for the investments you choose and the tax you might need to pay when your money grows, or you receive income.

Tax is easy to avoid by buying investments within a stocks and shares ISA or ii Managed ISA. Each year you can invest up to £20,000 and there will no dividend or capital gains tax (CGT) to pay at any point.

It’s impossible to avoid paying the other two, but there are steps you can take to keep them down.

Always shop around to check you aren’t paying more than you need for your investment platform. As your wealth grows, fixed fees can work well because your costs don’t go up as your portfolio grows.

• Your top ISA questions answered
• Discover our Don't be shy, ask ii questions here

You can also keep costs down by investing in passive investments like a tracker or exchange-traded fund (ETF), provided you aren’t aiming to beat the market. These don’t have a manager at the helm and simply replicate the performance of an index and, as such, are substantially cheaper than actively managed funds.

And it doesn’t necessarily follow that your returns will be less if you invest this way. According to the S&P Spiva report (which compares actively managed and passive investments), over the last 10 years, 80% of active funds underperformed their index in 17 out of 22 categories.

That’s not to say you shouldn’t invest in active funds – but you need to watch performance closely and compare it to its index to ensure you are getting value for money.

6) How will you react if the value of your investment falls?

Nobody likes the prospect of losing money and it’s important that you don’t invest in anything that will keep you awake at night.

However, it’s important to view potential losses objectively and with perspective. Even when you aren’t investing in a higher risk fund, the value of your investment will inevitably rise and fall. It’s part and parcel of investing but how you respond can make all the difference to your investment’s success.

When markets suffer sharp falls many investors sell in a panic, but all this does is crystallise your losses and means you miss out on the opportunity to start recouping them when markets recover. Keeping calm and focusing on your long-term goal is usually the better option.

• Is there a short-cut to investing success?

There are also many steps you can take to reduce your risks. In addition to ensuring your money is invested across a broad range of companies, you can invest some money in bonds to reduce the overall risk of your portfolio. Some funds will spread your money across both.

You can also reduce your risk by investing a smaller amount each month, rather than lump sums – you can make a quick and significant loss if you invest a larger amount just as stock markets fall. By investing regularly and drip feeding your money in the market you are more likely to get a smoother return.