‘Combat inflation’ 9 tips for novice investors: How to ‘nail’ an investment style

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The Bank of England has been increasingly upping its base interest rates in a bid to stem spiralling inflation. However, interest rates still remain historically low, meaning while inflation climbs, savings accounts erode in value. Consequently, people are on the search for better returns for their money, and investing in stocks and shares can be a good way to do this.

Alice Haine, personal finance analyst at Bestinvest, told Express.co.uk: “With inflation hitting 10.1 percent in July and the expectation it could top levels as high as 18 percent in January as the cost-of-living crisis ramps up, anyone lucky enough to have spare money to pump into a savings account will quickly see the real value of that pot eroded by soaring prices.

“No easy access savings account is any match for inflation rates in the double digits, so investing that money instead could be a better inflation-busting strategy, as long as you don’t need that cash for at least five years or more.

“Money directed towards pensions and investments has a better chance of beating inflation, thanks to the magic combination of compound interest and time.”

However, there are some key considerations people should take before taking the leap into investing.

Ms Haine continued: “There’s no point investing your hard-earned money in the stock market if you are struggling to meet rising household bills, have outstanding debts and no backup funds set aside for emergency expenses,”

“Not having the basics of personal finance sorted leaves you very exposed if life throws an unexpected curve ball and you need to dip into your newly invested funds to meet that expense. Instead, get your finances into a solid position so that you can explore capital markets without the fear you are leaving yourself short elsewhere.”

For those interested in starting a portfolio, here are nine key tips to prepare.

Clear any short-term, unsecured debt

Ms Haines said: “Steer clear of the markets if you have outstanding debts on credit cards or expensive loans.”

The interest rates on any short-term debt may be higher than the rates of return secured on investments, so clearing credit cards, payday loans or expensive loans should generally be a priority.

Ms Haines said: “If you direct money towards investments before you have cleared your balances, you risk missing payments, which will then incur penalty fees, affect your credit profile and make it harder to access credit in the future.

“Even if you are already repaying your balances, wait until the debt is under control or cleared entirely before you consider investing.”

Build up a healthy emergency fund

Building a sizeable emergency pot can help absorb any sudden shocks to personal finances, reducing the likeliness of dipping into any investment funds.

Ms Haines said: “While three to six months’ worth of expenses is the typical minimum recommended to be held in an easy-access savings account, Bestinvest coaches advocate a more solid buffer of at least 12 months’ expenses.”

Set your household budget

Before making any major financial decision, it’s crucial to have a firm grip on household finances.

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Building a budget is a straightforward process that involves adding up your total monthly expenditure, something you can do by checking bank and credit card statements and deducting that from your net take-home pay.

Ms Haines said: “It will also identify any areas where you are overspending so that you cut back to free up more cash for your savings and investment goals.”

Select your financial goals

Whether an investor wants to finance a child’s education, pay for a wedding, save up for a deposit for a house or fund a retirement, setting a clear goal pays off.

Ms Haines said: “Once you know what you want to save for, then you can align an investment timeline to fit in with that strategy.

“Saving for a holiday for example is a short-term goal with cash built up for that purpose best kept in an easy-access savings account because you will typically use the money within a year. A child’s university education or funding your retirement are long-term goals more suited to investing in the markets.”

Consult a financial coach

Before diving into the world of investment, it can be good to get a second opinion from a qualified financial professional to make sure the right path is chosen.

Ms Haines said: “Coaches can provide guidance on whatever query novice investors have during their investment journey. From identifying financial goals and how they might achieve them to helping them assess their tolerance to risk and understand how fees and taxes are applied.”

Coaching can also be much cheaper than paying for advice, with Bestinvest’s 45-minute coaching service, for example, one of the free services of this kind in the market.

Choose your investment vehicle

After consulting a coach and figuring out a timeline, attitude to risk and what to invest in, the next step is to consider how to invest.

Ms Haines said: “For DIY investors, this means choosing your investment vehicle, whether it’s a straightforward investment account with an investment platform through which you buy stocks and funds or a Self-Invested Private Pension to top up your workplace and state pensions.”

Nail your investment style

The markets may appear too fluctuant for the appetites of nervous first-timers, so it is also wise to decide whether to invest lump sums or smaller, regular amounts, according to Ms Haines.

She said: “A good starting point for new investors can be to drip feed money in smaller amounts into their chosen investment, either monthly or quarterly, no matter what the price is at the time.

“This strategy not only makes people disciplined about investing on a regular basis but also takes advantage of pound-cost averaging.

“This cushions some of the effects of volatility by averaging out the price you pay – making your investment costs lower over the long-term and, hopefully increasing the likelihood of securing decent returns that combat the effects of high inflation.”

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