Beginner's Guide to Start Investing in the UK
Our Guest, Joshua Shepherd, a London based Independent Financial Adviser, explains how to start investing, difference between saving and investing, ISAs vs. Pensions, index funds, and how to manage risk.
"If you’ve got £50 or £100 a month to spare, should you invest it? Where? How do you start without losing sleep?"
This is the conversation I have every day with people who have built up a good savings habit and are ready for the next step. The world of investing can seem intimidating from the outside – full of jargon, scary-looking charts, and stories of market crashes. It’s no wonder so many people feel nervous.
But the truth is, modern investing can be simple, accessible, and is the single most powerful tool you have for building long-term wealth. Today, I'm going to answer the most common questions I hear from beginners to demystify the process and give you the confidence to get started.
What’s the difference between saving and investing?
This is the most important distinction to understand. They are not the same, and they have different jobs in your financial plan.
Saving is putting money aside in a safe place, like a bank account or a Cash ISA. Its primary goal is capital preservation. You are protecting your money for short-term goals (a holiday, a house deposit in the next couple of years) or for your emergency fund. The return you get (interest) is usually low, and your money is generally protected (e.g., by the FSCS). The biggest risk to your savings is inflation, which can erode its purchasing power over time.
Investing is using your money to buy assets that have the potential to grow in value, such as shares in companies or property. Its primary goal is capital growth. You are taking on a higher level of risk in the hope of achieving a return that significantly beats inflation over the long term. The biggest risk to your investments is market volatility – the value of your assets can go down as well as up.
Think of it like this: saving is your safety net, investing is your engine for growth.
How do you make your money work for you?
You make your money work for you through the magic of compound interest, or more accurately, compounding returns. Albert Einstein reportedly called it the eighth wonder of the world, and for good reason.
Compounding is the process where your investment returns start to earn their own returns. It creates a snowball effect that can turn small, regular contributions into a very large sum over time.
Simple Example:
You invest £10,000. In year one, it grows by 7%, so you make £700. Your pot is now £10,700.
In year two, if it grows by another 7%, you're not earning 7% on your original £10,000. You're earning it on £10,700. So you make £749. Your pot is now £11,449.
That extra £49 might not seem like much, but over 30 years, this effect becomes incredibly powerful, with the growth on your growth eventually becoming larger than your initial contributions.
This is how you truly make your money work for you – by putting it in a position to grow and then giving it a long, uninterrupted period of time to do its work.
Can we use AI for investing?
AI is becoming a significant part of the investment landscape, and for most beginners, it’s a positive development. When we talk about AI in retail investing in the UK, we're primarily talking about "robo-advisers."
What they are: Platforms like Nutmeg or Moneyfarm use algorithms (a form of AI) to build and manage a diversified investment portfolio for you. You answer some questions about your goals and risk tolerance, and the "robot" does the rest – selecting the investments and rebalancing them for you.
My Take: I think robo-advisers are a fantastic starting point for many people.
Pros: They are low-cost, accessible (you can start with small amounts), and they automatically provide the diversification that is so crucial for managing risk. They take the emotional guesswork out of investing.
Cons: They offer limited customisation, and their fees, while lower than traditional advice, can be higher than a pure DIY approach.
AI is a tool. It can be brilliant for executing a sensible, diversified, low-cost strategy. However, it can't understand your unique personal circumstances or coach you through a market panic in the same way a human adviser can. For beginners, it's a great way to get started with a sensible default.
Should I use a Stocks & Shares ISA or a Pension to invest?
This is a great question, and the answer for most people is: you should aim to use both. They are the two most powerful tax-efficient wrappers available, but they have different purposes.
A Pension (like a SIPP or workplace pension):
The benefit: You get upfront tax relief. For every £80 you put in, the government adds £20, instantly turning it into £100.
The restriction: You cannot access the money until you are 55 (rising to 57 from 2028).
Use it for: Its sole purpose is long-term retirement savings.
A Stocks & Shares ISA:
The benefit: You invest from your post-tax income, but all your growth and withdrawals are completely tax-free.
The restriction: There's no upfront tax relief, but you can access the money at any age.
Use it for: Long-term goals where you need flexibility, such as saving for a house deposit (alongside a LISA), or bridging the gap to early retirement before your pension is accessible.
Joshua’s advice for a beginner:
First, make sure you are contributing to your workplace pension, at least enough to get the full employer match. This is free money and unbeatable.
Then, use a Stocks & Shares ISA for your additional long-term investments.
Know Where You Stand: Take the Plouta Financial Wellness Survey
Taking our Financial Wellness Survey is a great first step. It will help you reflect on your habits and identify the key areas to focus on in your journey towards financial freedom.
What’s an index fund, and why do people love Vanguard or BlackRock kind of funds?
An index fund is the simplest and, in my opinion, the best starting point for almost every new investor.
What it is: Instead of trying to pick a few "winning" companies, an index fund simply aims to track the performance of an entire market index, like the FTSE 100 (the 100 biggest UK companies) or the S&P 500 (500 of the biggest US companies). A global index fund will track thousands of companies all over the world.
Why people love them:
Instant Diversification: By buying one fund, you are instantly invested in hundreds or thousands of companies. This dramatically reduces the risk of any single company performing badly.
Extremely Low Cost: Because the fund isn't paying expensive managers to pick stocks, the annual fees are tiny (often 0.1% - 0.25%). This means more of your money stays invested and working for you.
Proven Performance: Over the long term, very few professional active fund managers manage to consistently beat the market average. By buying an index fund, you are guaranteed to get the market's return, which has historically been very strong over long periods.
Vanguard and BlackRock are two of the biggest and most respected providers of these low-cost index funds and ETFs (Exchange Traded Funds, which are very similar). They are loved because they pioneered this low-cost, investor-first approach. When you buy a Vanguard S&P 500 tracker, you know you are getting a reliable, cheap, and diversified way to invest in the US stock market.
How risky is investing?
This is the question that causes the most anxiety. The honest answer is: in the short term, investing in the stock market is very risky. The value of your investments will go up and down daily, and it's not uncommon for markets to fall by 20% or more in a bad year.
However, over the long term, the picture changes. Historically, stock markets have always recovered from downturns and have delivered returns that are significantly higher than cash or inflation. The real risk is not the short-term volatility, but either:
Not investing at all and letting inflation destroy the value of your savings.
Panic selling during a downturn and locking in your losses.
The key to managing risk is diversification (which index funds provide) and time.
What’s the minimum term I should plan for?
For this reason, the golden rule is that you should only invest money in the stock market that you can afford to leave untouched for at least five years, but ideally ten years or more.
This five-year timeframe gives your investments a good chance to recover from any short-term dips in the market. If you need the money for a short-term goal (like a house deposit in two years), it should be in a safe place, like a Cash ISA or a high-interest savings account, not invested in the stock market. Investing is a long-term game.
Key Takeaways for Beginner Investors
Emergency Fund First: Before you invest a single pound, ensure you have a solid emergency fund of 3-6 months' worth of living expenses in an easy-access cash account. This is your safety net.
Investing is for the Long Term: Only invest money you can afford to leave untouched for at least five years. This gives your investments time to recover from any short-term market downturns.
Start with a Simple Index Fund: For most beginners, a low-cost, globally diversified index tracker fund is the best starting point. It provides instant diversification and takes the guesswork out of picking individual stocks.
Use Your Tax Wrappers: Always try to invest within a Stocks & Shares ISA or a pension (SIPP). This protects all your investment growth from UK tax, which can make a huge difference to your final returns.
Consistency Beats Timing: Don't worry about trying to "time the market." The most powerful strategy is to invest a regular amount consistently every month. This builds a strong habit and smooths out your purchase price over time.
Conclusion & Your Next Step
The journey from saving to investing can feel like a big leap, but as we've seen, the core principles are straightforward and accessible to everyone. By understanding the role of risk, harnessing the power of compounding, and using simple, low-cost tools like index funds within an ISA or a pension, you can start building a future where your money truly works for you.
The key is to move from thinking to doing. These principles provide a powerful framework, but your personal financial journey is unique. If you're ready to create a plan that's tailored to your specific goals and circumstances, I'm here to help.
Ready to start your investment journey with confidence? Book a complimentary, no-obligation call with Joshua, to create a clear and simple plan that's right for you.
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Disclaimer: This article provides general information and is for informational and educational purposes only. It does not constitute financial advice. The suitability of any investment product depends on your individual circumstances and risk tolerance. The value of investments can go down as well as up, and you may get back less than you invested. Always seek professional, regulated financial advice tailored to your specific situation.
