How to decide if you’re ready to invest
A checklist to help you make sure the time is right
Getting ready to invest can be daunting, even if you’re fully aware of the benefits. It’s a big step to move from saving, which often feels like the safer option, to taking on investment risk and diving into markets that are constantly moving up and down.
Only you can decide if now is the right time. But asking yourself the following four questions might help you make that decision.
1. Are your financial foundations in place?
It’s great to make investing a priority. Before you invest, though, it’s worth getting a few other financial basics in place:
Pay off any short-term, high-interest debts
If you’re currently paying off any personal loans, credit cards, buy-now-pay-later purchases or similar, you’re probably better off putting any excess income towards these than investing it. That’s because the growth you achieve from your investments could be lower than the interest that’s accumulating.
Don’t worry about long-term, lower-interest debts like student loans or mortgages – you can pay these off at the same time as investing.
Save enough cash to cover 3-6 months of essential spending
Once your money is invested, it’s best to think of it as locked away for several years. Of course, you can withdraw it whenever you want, but the ups and downs of the markets mean that withdrawing too soon could mean accepting a loss.
So, it’s helpful to have enough cash available to cover any unexpected expenses that might come up in the next few years.
Have a plan to reach your short-term goals (less than 3 years)
Similarly, you’ll probably want to have enough cash available for any big events and major purchases you have coming up in the next five years. If you’re getting married, buying a home, or planning a big trip in that timeframe, it’s unwise to have all your money tied up in investments.
Still, you might decide it’s possible to save towards those goals while also investing for the longer term.
2. How comfortable are you with risk – and which fund fits?
Think about the possibility of making a loss in your first year of investing. Would you be able to stay calm and wait for your investments to recover, or might you make a snap decision to withdraw your money? How big or small could a loss be before you got nervous?
Be honest with yourself, so you can choose an appropriate level of risk. If ups and downs will make you nervous, it may be more appropriate to go for options that aim for slower, smoother growth.
As well as being financially and practically ready to invest, you need to feel emotionally prepared. Mainly, that means understanding how much you’re likely to see the value of your investments rise and fall in the short term, and being comfortable with it.
Investments can go up and down in value, and you could get back less than you put in – but over the long term (five years or more), they’ve historically outperformed savings.
Prices move because of all sorts of things – world events, economic cycles, individual company news. The key thing to know is that dips happen, and they’re usually temporary as long as you don’t panic-sell on the way down.
Practical ways to soften the ride
The main one is diversification – spreading your money across many different investments, asset types, countries and industries, so a problem with any one of them doesn’t pull everything down.
Multi-asset funds do this for you automatically, holding a broad range of investments in a single product. At Zopa, we’ve kept it simple. Our two ready-made funds – Balanced and Bold – are built with beginners in mind by the experts at Invesco, one of the world’s biggest investment managers.
You pick the one that fits your goals and how you feel about risk, and they take care of the rest. If you’d like help choosing, our Balanced vs Bold guide breaks down the differences.
If you do want to do it yourself, it’s worth knowing the difference between shares, bonds, and other major types of investments. You can invest in them directly (putting together a portfolio yourself).
You should have an idea which is the right path for you. If you have doubts, bear in mind that investing directly is more complex and time-consuming. Choosing a fund is much easier, as you’ll just need to find one that matches your goals and risk level.
3. Have you used your ISA allowance?
Once you know how you want to invest, the next call is which account to hold your investments in. For most people, the easy answer is a Stocks & Shares ISA. You can put up to £20,000 into ISAs each tax year, and any growth or income inside the wrapper is free from UK tax.
If you haven’t used your £20,000 allowance for this tax year, opening a Stocks & Shares ISA is usually the simplest way to start investing. The allowance resets each April, so it’s a use-it-or-lose-it deal. If you’ve already maxed it out, a General Investment Account (GIA) is another option – it doesn’t have a limit, but the gains and income are taxable.
4. Is now the right time?
You might find this the hardest question to answer. Many people are waiting for the perfect moment, when they feel really sure that the markets are headed upwards. Any sign that that’s not the case will make them hesitate.
But there is no perfect moment. Investing means accepting that there will be ups and downs, and the downs might come sooner than you’d like. Five or ten years from now, it shouldn’t matter. The only change that really counts is the overall change from when you start investing to when you withdraw.
If nerves are still holding you back, consider investing a small amount every month rather than a large amount all in one go. With this approach, you’ll be buying into the market at a range of higher and lower prices, which will average out over time. With Zopa, you can start investing from as little as £1 and add more whenever feels right – so you don’t need a big lump sum to begin.
Remember the phrase time in the market beats timing the market. It means that your investing success depends far more on how long you leave your investments to grow than on whether you bought them at the perfect moment. Just bear in mind that past performance isn’t a guarantee of future returns, which is why giving your investments time to weather the ups and downs matters so much.
With that said, the best time to start investing is as soon as you feel ready to. If that’s today, you can open a Zopa Stocks & Shares ISA in minutes – invest up to £20,000 a year tax-free, from as little as £1, with two ready-made funds to choose from.
