Investing for beginners

Whether you’re new to investing, or would just like to refresh your knowledge, there’s something here for everyone. Prefer to speak to someone in person? Book a free call with our friendly team who can provide you with more information about the different types of investments, help you plan your investment journey and answer any questions you may have.

Is investing right for me?

At Nutmeg, we believe investing should be open to the many, not the few. So long as you can afford it, there are no set rules around the kind of person that can or cannot invest, the amount of experience you need or your level of wealth.  

Investing can help you achieve long-term financial goals, like buying your first home, going on a dream holiday or your retirement. It’s designed to help you grow your money. It’s a bit different than saving in cash – investors put their money away for a minimum of three to five years and can see it fluctuate in value over time.  

If you have cash savings, long-term goals, and can cope with putting your money away for a few years, investing might be for you. If you think you will need the money in the next three years and are uncomfortable with the thought that your pot can go down as well as up, investing might not be right for you.   

What happens to my money when I invest? 

When you invest, you buy different kinds of assets that you think will increase in value over time. The two most popular asset classes are equities (also known as ‘stocks’ or ‘shares’) and bonds. We’ll explain what these are in more detail later. 

What are the benefits of investing?

There can be several benefits to investing for the long-term. It puts your hard-earned money to work, giving it the chance of appreciating in value over time. It can help you reach your financial goals, beat inflation,and benefit from compound returns. If you’re so inclined, it can also become an extension of your values and a way of supporting the causes that matter to you: in recent years, socially responsible investing has become increasingly popular. 

It can help beat inflation

When inflation is high, investing can help your money retain its value. This is because investing offers the potential for growth and return over time, while rising inflation means that cash can gradually lose value as the years roll on.  

Inflation is the rise in the cost of goods and services over time – something we all became acutely aware of in 2022. High inflation can raise our bills, eat into our disposable income, and erode the value of our cash savings. In December 2022, UK inflation was 10.5%. If you had £100 saved in cash in December 2021, by December 2022, the value or purchasing power of your £100 would have declined by 10.5%, or now be worth £89.50.  

Over the long-term, investing might help your money retain and grow in value. This is because investments ‘grow’ through increases in the underlying prices of the assets you invest in and the reinvestment of dividends, though they can fluctuate in value over the time that you’re invested.   

For instance, if you started September 2012 with £10,000 saved in cash, by December 2022, it would have lost value, and only be worth £8,011. If you had invested it in Nutmeg’s Fully Managed Portfolio 7 - which is invested approximately 70% in equity exchange traded funds (ETFs), 5% in bond ETFs and 5% in cash, net of fees and adjusted for inflation, it would be worth £12,702.  

If you can afford to, investing is a good way to help protect some of your money against the effects of inflation. In turn, this can help you continue progressing towards your financial goals and objectives.

It can make compound returns work to your advantage 

Compounding is sometimes referred to as the eighth wonder of the world. Compound returns can be an investor’s best friend. 

The basic concept is simple. In the first year of investing, you generate returns on your initial investment. In the second year, you stay invested, and invest the returns. This means that you increase the total value of your investments. And it goes on. Over time, your money snowballs into a pot that you can eventually use for the goal you had in mind.  

Investing your returns over and over is known as ‘compounding’.  

Of course, investing is always subject to the ups and downs of the stock market, so returns aren’t guaranteed every year. However, investing over a long timeframe can help make up for potential losses and give you the best chance of growing your money.  

Want to see for yourself? Try our compound returns calculator.

Compounding can be particularly effective for very long-term goals like retirement. If you start early enough, it could mean that you have to invest substantially less each month than if you had started later – because compounding starts to do the hard work for you.  

For example, if you’d invested £5,000 in the FTSE All Share in 1993 – and withdrawn any returns – by the end of 2022, after adjusting for inflation, it would have grown to £7,423.1 If you’d let your investment benefit from compounding (by ‘re-investing’ the returns), after inflation, you would have had £20,848 for the same period.2  

Is investing safe?

Investing carries risk. But it also carries the potential for reward.  

There are three ways we can think about risk in the context of investing.  

1. Your tolerance for risk: over the short-term, the value of your investments will go up and down. How comfortable are you with this? It’s important to be honest with yourself here. Risk appetite and risk tolerance are very personal, and it’s not a competition. If you feel comfortable investing your money, choose a level of investment risk that means you won’t lose sleep at night.   
2. Your capacity for loss: in other words, what can you afford to lose? Before investing, it’s important to have a good buffer of cash savings that you can draw on in an emergency. If you’re going to need the money in three to five years, it’s probably a good idea to save in cash rather than invest it.  
3. What you’re investing in: different assets have different levels of risk. High risk assets usually have higher rates of return, but a higher possibility of loss, and vice versa. Here at Nutmeg, we build our portfolios based on different risk levels, so you’re investing in assets that align with the level of risk you’re comfortable taking.  

As an investor, you can exercise control around the amount of risk you want to take. You can decide what the balance between risk and reward feels like for you.  

You cannot dictate which way the market will go, but you can try to influence how much your investments may rise or fall relative to it. Choosing the right level of risk will help you stay invested for longer and make it easier to stay on track to achieve your goals. So, if you’re new to investing, it’s worth taking plenty of time to explore and understand investment risk. 

At Nutmeg, we help people establish their attitude to risk by asking them to complete a risk questionnaire. These questions will help you understand how you feel about investment risk and determine what the right investment strategy is for you. Our friendly team of experts can chat to you about this in more detail.

How does investing work?

When you invest, your money will typically be invested in or exposed to different assets. Here’s a simple guide to the main asset classes.

Investing in equities 

Equities are ‘shares’ in a company that can grow over time. As companies are connected to and affected by what is going on in the wider world, the value of their shares can fluctuate in the short-term. But, over the long-term, they tend to rise in value, benefiting investors.   

Investing in bonds 

Bonds are a form of debt, with similar characteristics to a loan. They are issued by companies and governments around the world, and are thought to be more stable than equities, but generally offer a lower rate of return. They are sensitive to interest rates and inflation. 

What should I invest in?  

Investors often hold equities and bonds at the same time. This is so they can balance each other out – bonds provide a degree of stability, while equities offer the prospect of higher but more volatile returns. This is referred to as diversification. 

Here at Nutmeg, our team of investment experts will choose ETFs for you, and set your exposure to equities and bond funds based upon the level of risk you have chosen. A discretionary manager can also amend this allocation and the funds held, dependent upon the economic outlook and market movements.  

How do I buy equities and bonds?  

There are several ways you can buy equities and bonds. 

• You can buy individual shares or bonds via a broker  
• You can buy units in a fund, which invests in several companies or bonds at once 
• You can buy equities and bonds simultaneously by investing in a portfolio, which holds several funds at once

How much tax do you pay on investments? 

How you buy and sell the assets you invest in can affect the amount of tax you pay.  

If you invest using an Individual Savings Account (also known as an ‘ISA’), you do not have to pay tax on the returns you make. ISAs are a tax-efficient way of investing, and there are different kinds available: 

• Stocks and shares ISAs allow you to invest your money without having to pay tax on the returns, up to the annual allowance of £20,000 
• Lifetime ISAs allow you to invest towards your first home or your retirement and get a government bonus, up to the annual allowance of £4,000. 
• Junior ISAs allow you to invest up to £9,000 a year on behalf of your child.

If you invest using a General Investment Account, you may be eligible to pay tax on any returns you make. To learn more about this, click here.    

At Nutmeg, we do not offer self-directed accounts – we buy and sell assets on your behalf. If you use one of our product wrappers, you may only be liable for tax on the return of your investments, not the sale and purchase of the underlying assets.

How do I start investing?

Once you’ve identified your goals, the level of risk you want to take, and understood what you can invest in, you’re ready to get started. So, how do you invest?  

DIY Investing  

You can build your own portfolio of investments using an online platform. There are many providers in the UK that allow you to select a range of shares or funds and track their performance over time.  

Investing in this way gives you a high degree of control and choice over what you invest in. It can also be more time consuming: because you are selecting where your money goes and when, to do it well, you’ll need to be comfortable analysing markets and companies to be sure you’re staying within your risk threshold, aren’t taking dangerous bets and are appropriately diversified.  

If you’re a DIY investor, it’s also important to note the difference between online brokerage platforms and online trading platforms. Brokerage platforms allow you to buy and sell individual stocks or funds, while trading platforms also allow you to enter buy and sell ‘derivatives’ (which are higher risk, more complex, and more sophisticated). Trading platforms have become increasingly popular in the last couple of years, but they use gamification, which can spur you to take on more risk than you want to. Proceed with caution.  

Get some help from a financial adviser

Investing isn’t something you have to do by yourself.  

A stockbroker or financial adviser can work with you to build a portfolio based around your aims, objectives, tolerance for risk and preferences.  

Alternatively, financial planners can help give you a clearer and more objective view of your finances, and give you qualified advice on the investment strategy that’s right for you.  

Here at Nutmeg, we provide fully regulated restricted financial planning. Book a free call today to see if this could be right for you.

Invest with Nutmeg  

We offer a range of portfolios that are transparent, globally diversified, and managed by our highly experienced investment team. You can choose your risk tolerance, pick one of our four investment styles, and leave us to select and manage your investments.   

Want to learn more or need help setting up your own investment strategy? Book a free call with one of our experts.