Making your investment choices – beginners guide

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It doesn’t happen to all of us, but there is always the chance you may come into a lump sum of money. Maybe you get lucky on the lottery, or maybe a relative leaves you something; either way you’ve always been told that when you come into money you should invest it.

But how do you actually go about it? What investment vehicle do you choose? Have you been asking yourself questions like what is a stocks and shares ISA? Should I open a self-invested personal pension? Whichever savings vehicle you opt for you’ll still be asking yourself the same questions on how you actually go about investing your cash.

Here are a couple of pointers.

Lump sum

You may think the best option is to simply invest all your cash in one go. After all, if you drip feed it in on a monthly basis only some of your money will be earning potential returns in the first few months of investment. If you go all in from the beginning, 100% of it will be earning straight-away.

However, the downside to this is that if your investment drops (say by 20%), this will drop across the board and it may take a while for your savings to recover. If you hold your investments for the long haul, this does offer the chance for your stocks to come back strong, but it can potentially be a long process. As is the case with any kind of investment, there is always the chance it will go down as well as up.

Pound-cost averaging

Whether investing through a stocks and shares ISA, looking at the UK self-invested personal pensions on the market, or whatever savings vehicle, an alternative option to investing everything all at once, is drip-feeding it in on a monthly basis. Also known as pound-cost averaging. This enables you to smooth out the highs and lows of the investment game, as well as dipping your toe into the water, so to speak, to gauge an understanding of how it all works.

It also has advantages for your money. Say for example you invested all your £1,000 and the share price went down, it would go down across the board. However, if you invested first in 50 shares one month and then 50 the next, if the share price goes down when you buy the next month you can actually get more shares for your money. If it then goes back up to the original price you’ll then have more shares than you could potentially have had before at the original price. It’s all about playing the game.

Whichever way you go, it’s up to you. There are pluses and minuses to each option. The choice is yours.