A simple guide to start investing

Content by M&G Investments

5 min reading

Whether taking the first steps on your investment journey or re-evaluating how your money is put to work, you should first decide on your financial goals.

Generally speaking, investors tend to either prioritise targeting capital growth or a stream of income.

What do you want from investing?

GROWTH or INCOME

1.GROWTH

When the current value of an asset is greater than the price initially paid, capital growth has been achieved. Or Growth strategies often aim to deliver jam tomorrow, not today, and can be well suited to patient investors who can take a long-term approach. After all, it might take many years before the value of an asset to realise its potential – and there’s no guarantee it ever will.

In general, higher risk investments can offer higher potential growth, but you have to accept that you could lose some or all of your initial investment.

Any asset that is seen as undervalued at its current price is an opportunity for a long-term investor who can pay less interest to short-term fluctuations in asset prices and aim for capital growth over time.
The value of any asset can rise or fall – equities (company shares), bonds or commercial property.

Equities – There is no limit on how high share prices can rise, or how low they can fall if a company fails. The shares of smaller, younger companies, or those that are out of favour, are obvious examples of investments for growth – albeit at the more adventurous end of the spectrum.

Bonds – It’s possible to buy a bond for less than its face value and achieve capital growth by holding it until it matures. A bond’s value might also rise during its life if interest rates or inflation falls, making its income payments more attractive. The reverse is also true, of course.

Property – The value of commercial property can be driven up, or down, by a range of factors, including: supply and demand; location and quality; tenancy (reliability of rental income); vacancy rate (when unoccupied there’s no income); and liquidity (how difficult it is to sell).

Value investors believe that any asset can be moved away from 'fair' long-term valuations by short-term factors, including sentiment. Over time, asset prices can recover to their ‘fair’ value, delivering capital growth for the patient investor who is unconcerned by day-to-day fluctuations in asset prices.

2.INCOME

In the climate of low interest rates, drawing an income from cash savings alone may no longer be sufficient for many people to meet their financial ambitions or needs. Income from investing can help plug that gap.

Income strategies often prioritise jam today, not tomorrow, as they generally prioritise cash generation over capital growth. They can therefore be well suited to investors who are relying on their investments to support their current lifestyle.

However, income investing can also suit those with a longer-term outlook as any profits can be reinvested, hopefully generating their own income and capital growth over time.

All the major asset classes – bonds, equities (company shares) and property – can each deliver income for investors.

Bonds – You are normally paid a fixed rate of interest – a coupon – from the government or company that issued the bond. This should a stable, regular income for the life of the bond, so long as the issuer keeps up with its payments and doesn’t default on its debts.

Equities – Shareholders can receive an income in the form of dividends, which are distributions of company profits. Many companies are committed to regularly paying out dividends, or even raising them, but they can be cut or stopped at any time if the company decides to.

Property – Commercial property is generally rented out for a fixed period of time, with rental payments from tenants providing a regular income for the term of the lease – so long as tenants keep up with their payments and the property doesn’t lay unoccupied.

In general, higher risk investments can offer higher potential incomes, but you have to accept that income from investing can never be guaranteed and you could lose some or all of your initial investment.

To make the right income investment decisions you need to consider whether you want a more modest income that carries lower risk, or if you are looking for a higher income and are willing to accept more investment risk.

There are other factors to consider too, such as reliability of income streams and whether it matters to you that your income maintains its real value, rising (or falling) with inflation. It might also be important to you that your investment pot retains its value (even after inflation) while working to deliver an income.

Things to consider

It’s important to remember that all investing involves some level of risk, and the amount that’s right for you will depend on your outlook as well as financial circumstances.

You might have other savings, in the form of pensions or cash in the bank, and assets, such as property, that play their own role in your financial planning. This could shape ambitions for your investments.

Your investment risk will always be lower if you diversify effectively – in other words, by not putting all of your eggs in one basket. Different investments will perform differently in various circumstances, so investing across assets and regions can reduce the risk of losses.

FUNDS: By investing through a fund that pools your money with other investors’, you can gain access to a wider range of investments. Professionally managed ‘active’ funds will aim to achieve a specific objective, with an approach to risk and return that may align with yours.

The objective of an actively managed fund could resonate much more closely with your personal investment goals than a ‘passive’ fund which will look to mirror the performance of a wide index of assets.

If you decide that investing for growth or income is the right approach for you, you will find an array of growth- and income-focused funds managed by a number of fund managers, including M&G.

As with all investments, the value of your investments will fluctuate, falling as well as rising, and you may not get back the original amount you put in.

M&G is unable to give any financial advice, and the views expressed in this article should not be taken as any kind of recommendation or forecast.