Investing for the very first time can be quite a daunting prospect. With thousands of funds to choose from, and a whole plethora of other products and factors to consider, it is often difficult to know where to start.
Yet, this can be a very important decision and one which can have a huge impact on how much money you make or lose. It could be the difference between a jet setting retirement of comfort or one counting the pennies.
In a new series, FE Trustnet takes it back to the basics and speaks to investment professionals on what advice they would give to anyone looking to invest for the first time.
Over the next few weeks, we will be covering the different types of funds such as open-ended and closed-ended funds (investment trusts), how to build a portfolio, how to choose a platform and which ISA wrapper is right for you.
It is important to remember that investing for the first time is not easy, as Wellian Investment Solutions chief investment officer Richard Philbin warned.
“There are literally hundreds of starting points when it comes to “starting” out on the world of making your first investment, so my starting point is likely to be different to another commentators and that’s why, in all honesty investing is difficult,” he said.
“It’s akin to getting advice when you become a parent for the first time – everyone has the “right” answer…”
In the first article of the series, we will be looking at what investors need to know before diving into the wide world of investments. 
Please note, the value of your investment is not guaranteed to increase and may fall.
What is your financial position?
Charles Stanley Direct pensions and investments analyst Rob Morgan (pictured) said the first thing to consider when starting out in investing is your overall financial position ie. do you have debts or credit card balances that need paying off?
What are your goals and timeframes?
Next, he said it is important to identify your investment goals and how long you want to be invested for because this will determine what assets you invest in.
For example, are you investing for five years or less to save for a deposit to buy a house, or are you investing for a longer period of time towards retirement?
Understanding the different asset classes
When you invest, you are buying assets, which are grouped into asset classes. The two main asset classes are equities and bonds, while cash, property and commodities are other well-known asset classes.
Equities tend to be high-risk assets, while bonds are typically low risk but we will come back to this later.
Jason Hollands, managing director at Tilney, said another thing to consider is knowing if you want to grow the capital you invest it or recoup an income.
Normally, investment vehicles will aim to achieve one or the other, or both, and it will often reveal this on the product’s objective but it is an important thing to know so you can align your objective with that of what you have bought.
Understanding risk and reward
The next big factor that you need to know before investing is understanding the relationship between risk and reward and knowing your own aptitude to risk.
Charles Stanley Direct’s Morgan said a basic rule of thumb is that if a product has a low level of risk (volatility), the return is expected to be low, but if it has a high level of risk, the return is expected to be high.
How much risk should you take?
Linking your risk and reward to your goals means that you can better decide how much risk you should be willing to take.
Tilney’s Hollands said that, in very broad terms, the longer you expect to be invested for, the greater risk you should be prepared to take in being more exposed to volatile assets such as equities.
“For example, a very young investor putting money into a pension that they might not be able to access for 30 years or more, could start out with a focus largely or entirely in equities since they have ample recovery time to address any short-term market setbacks,” he said.
“However, an investor with a five-year view aiming to use the assets to repay a mortgage will need to pursue a more conservative strategy.”
US equities vs US bonds over the long term
Source: FE Analytics
Investing is a trade-off
Wellian’s Philbin said you should think of investing as a trade-off. If you want higher interest rates on a deposit account, you have to give up instant access. Equally, you’ll get better returns from equities in the long run but you’ll have to ride out day-to-day volatility, he said.
Indeed, equities have historically been the most volatile asset class but have also given investors the best returns over the long term, as the above chart shows.
Inversely, he said keeping your money in cash, also known as money market instruments, is the lowest-risk approach.
But despite keeping your money secure, it will provide little, if any, return and is unlikely to keep up with inflation, therefore leaving you with less buying power and poorer over the long-term, he said.
Tilney’s Hollands added that when it comes to investing, many people are too cautious thanks to a culture of “health and safety” that constantly paints risk as “a bad thing”.
He said the first base for any investor should be to deliver a return that at least beats inflation and to do that, you require a sensible degree of risk taking.
Make sure you’re comfortable with your level of risk
However, even if you are a long-term investor and are fully invested in highly-volatile equities, you still need to be comfortable with the amount of risk you are taking.
Chelsea Financial Services managing director Darius McDermott (pictured) said: “It’s a cliché, but a true one – if you’re lying awake in bed at night worrying about whether you’re losing money, you’ve taken on too much risk for your comfort levels,” he said.
“Risk is very personal and what one investor considers ‘high risk’ may be ‘medium risk’ to another. A good question to ask yourself is how much can I afford to lose in the short-term?”
Head of personal investing at Willis Owen Adrian Lowcock said you can view the risk nature of a fund or trust, for example, by looking at its investment philosophy and style [often found on a factsheet] or by looking at the KIID document.
He said: “The KIID documents give a score of risk. However, this is based on historic performance, but at least it puts the risk on a scale. The key is to get an understanding of when a fund or trust will perform and how.”
In the next article, FE Trustnet will look at the factors you need to consider to help you choose your first fund.