Imagine you are new to investing, where do you start?
Dipping your toes in the investment waters
Lewis Carroll’s King of Hearts, had a simple answer to the question: “Begin at the beginning...and go on till you come to the end: then stop.”
In a funny way, the second part of that answer is the more relevant. Working out when you are planning to stop is the key — or to put it another way, what are you hoping to achieve? What’s your end game?
If it’s to fund buying your first home then the appropriate strategy is quite different from if you planning to fund your retirement in 30 years time,
There is a simple truth in investing, the time frame is key. Shares go up and down in value, and it is very difficult, maybe impossible, to second guess the timing of these rises and falls. That is why investing with a short time horizon is risky — you may buy just at the moment when shares are set to fall, and need to sell just as they are about to rise.
If your time horizon is short, tread with care — diversification is vital and I don’t just mean diversification in shares. Short-term investing is gambling unless you hold different asset types, cash and bonds, for example, not just shares.
Over time, shares go up. If you follow two simple rules, then long-term investing is nothing like gambling. The rules are:
- Gain true diversification among shares. By that I don’t just mean buy different stocks. Diversify across sectors, make sure you have investment in stocks operating in different regions. Make sure your investments are, as much as possible, non-correlated. By that I mean try to avoid investing in shares that are likely to rise and fall in tandem.
- The second rule: is diversify over time. Don’t just put all your money into shares on one day. If you had done that on December 30th 1999, at the peak of the 1990s, and had stocks representing a cross section of the FTSE 100, you would have had to wait over one and half decades before the capital value increased. If you had invested your money over a period of say five years, before and and after 1999, buying every month or so, then despite the stock market suffering one of its biggest falls of all-time smack bang in the middle of this period you would have made substantial profits relatively quickly.
The three Rs
There is also the three Rs of investing, research, research and research. Read the FT, read investment magazines, talk to experts, oh and most important of all, read this column, I mean what right thinking individual would enter the investment game without reading the thoughts on share.com!!!
Invest real money
I have one more bit of controversial advice. Don’t spend too much time with fantasy portfolios. When actual cash is at stake, research becomes an awful lot more interesting. There was a time when I thought the Financial Times was dry and dull. When I first entered the investment game, the FT suddenly became a compelling read.
It is amazing how fascinating stock broker reports, company results and news about the stock market become when you have cash at stake. It doesn’t have to be a lot. This is purely psychological. But then we are human, and when we are actively investing, that research is transformed from being dull to being as fun as following your preferred sport or your favourite box set on Netflix.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees
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