23 August 2016
10 steps to start investing
By Darius McDermott, Managing Director
Bad news always makes the headlines, while good news is rarely reported. Many people remember the end of the tech bubble in 1999 and the financial crisis of 2008, for example, which both resulted in almost 50% stock market declines. Not to mention what feels like almost daily updates at the moment about slowing economic growth or companies struggling to turn a profit.
So it’s not surprising that most ordinary people view the market as a risky gamble, which may or may not pay off. Over the long term, however, average stock market returns typically beat the returns you would get on a cash savings account. What's more, with interest rates in the UK now at all-time lows and inflation starting to creep up as the pound has fallen post-Brexit vote, savers have more incentive than ever to turn to equities.
Fortunately, investing may not be as hard as you think. If you take the time to learn a few basic principles and educate yourself, you may find you can make a big difference to your finances over time.
How to get started
- First, pay off any high interest debt, such as credit cards or bank loans, before you even consider investing. This is less a principle and more a golden rule! There’s no point investing when you’re paying huge interest on debts, as you're unlikely to earn more from your investments than you are being charged on your debts.
- Consider your goal and your investment time horizon. If you’re saving for a house deposit and plan to buy in the next couple of years, then investing in stocks is probably not appropriate because a big fall in the market might prevent you from reaching your goal. The key point to remember is that the longer your time horizon the better chance you have of making money in the stock market. If you’re going to be investing for over 10 years you should consider some exposure to the stock market.
- Think about your risk tolerance and be honest. Some people just can’t handle the swings of the stock market and it causes them sleepless nights. If you’re one of these people, investing in stocks may not be for you. Be aware that the stock market will almost certainly go through a major crash in the future but it’s impossible to know when. Prepare yourself for this before you invest. Unfortunately many smaller investors sell out at the bottom of the market after a big sell-off and miss out on the subsequent rally. That’s exactly what you want to avoid.
- Buy a fund not a stock. Buying a single stock can be very risky, even (or especially!) if you hear a great tip from a mate in the pub. Choosing stocks that will beat the overall market is hard and requires a huge amount of time, energy and experience. In a fund, however, if one or two stocks don't perform, you won’t lose all your money. To help you research which funds to buy, we compile a list of those we consider 'Elite', whose managers have a strong track record of outperformance. We provide performance data, free information and opinions on why we like each fund that we rate.
- Diversify. A classic investing mistake is when an investor puts all their money in a single stock, only for them to lose all their money if that stock crashes. By investing in a fund that makes many different investments, you immediately diversify and protect yourself. You can also diversify by region (UK, Europe and Asia, for example), company size and asset class – you don’t have to invest in stocks, you can also invest in bond funds or property funds, for example. Bonds are money that is lent to governments, corporations and municipalities in return for periodic interest payments. They have typically given a lower return, but they are generally much less volatile than stocks and, even more importantly, they often do well when equities are doing badly.
- Understand what your investment is and never take any fantastical claims or predictions of returns at face value. If it sounds too good to be true, it probably is! Check a fund’s underlying investments on the fact sheet. Beginner investors may want to check that their fund is an onshore fund. An onshore fund protects you in cases of fraud to the value of £50,000 per fund group. Of course this doesn’t mean you’re protected if the value of the fund’s investments fall.
- Start small. You don’t need to be rich to invest. For example, at Chelsea Financial Services you can invest with as little £50. Even making a small investment will get you in the habit of saving and following it will help you to build up your financial knowledge.
- Consider monthly savings. You don’t have to invest all your money at once. One of the best ways to start is by investing monthly. By investing monthly you can invest gradually, enabling you to take advantage when prices fall. Putting a fixed amount into a fund every month, regardless of market behaviour, is known as ‘pound-cost averaging’. Monthly investing promotes the discipline of saving, whereby a small amount invested every month over several years can build into a sizeable nest egg.
- Get value for money. Charges matter and unfortunately many providers aren’t transparent. Watch out for providers who take a minimum monthly charge or charge you for each transaction. There’s no point in investing £100 a month if there’s a minimum charge of £8 a month or if it costs £5 for each trade. Also watch out for the charges of the actual funds. Look at the OCF (ongoing charge figure), which includes the (annual management charge).
- Don’t trade (meaning buy and sell frequently) your funds, especially as a beginner. Don’t pay too much attention to noise in the media. Frequent buying and selling can be expensive and is usually pointless. A wise man once said that the stock market is a very efficient mechanism of transferring money from the impatient to the patient. Choose your initial funds carefully and then review them every so often. Once every six months should be enough. There’s a big difference between a trader and an investor.
Where to next?
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be