New to investing? This is my guide on how to start.
The beginners guide to investing
When I was a kid and my dad brought a newspaper home, I used to start reading at the back. Then, many years later, when I first flirted with investing, I found myself ignoring the football scores, and immediately turning to share prices. “Did you hear about Liverpool Barcelona?” someone my say, I wanted to respond, “No, but did you hear about BT’s latest results?”
I still read the back pages, but only if it was the back page of the FT, because LEX became a much more interesting read than the latest ponderings of Gary Lineker, or whoever the equivalent was, back then.
And that is my first observation to investment beginners — start investing with a modest amount of money. I wouldn’t bother with a dummy portfolio. When the money isn’t real, investing is dull, reading the finance pages is a chore. If you have real money at stake, you immediately find that reading the financial news is enormously enjoyable — forget Netflix, forget the latest Star Wars flick, or the World Cup, the finance pages is where the partying gets really wild.
The three R’s
There are three R’s to investing: research, research and research. That’s my second piece of advice. Once you have set aside a modest amount of money to enable you to dip your toes into investment waters, throw yourself into research. Read a book like ‘Investing for dummies.’ Learn your terms: learn your P/Es from PEGs, learn the difference between a quick ratio and net assets valuation. Learn what the CAPE is, learn, and learn...and read up about stocks.
You can start this research by reading my column ‘thought for the day.’
Set up an ISA
Some would say set up an ISA first — you can put up to £20,000 a year into an ISA, your partner can set up an ISA too. Alternatively, if you are either saving to buy a house or for retirement, set up a lifetime ISA and, within certain restrictions, the government will chip in 25% too, boosting your regular investments. Lifetime ISAs have an annual limit of £4,000. So you might set up a lifetime ISA and an ordinary ISA.
Understand the difference between investing and gambling
If you put all your money on one stock, or even a handful of stocks, or if you are hoping to make a quick buck to fund a planned holiday or to put down a deposit on a house you are planning to buy later that year, then investing in stocks and shares is not for you. Or if you do choose to invest for that reason, you are gambling.
Investing in shares becomes less risky the longer the time frame you are considering and the more diversified your portfolio.
Consider why you are investing and act accordingly
The rationale behind investing should determine the approach you take. If you have a lump sum and want to live off the returns from this sum, invest in companies that are big dividend payers.
If you have a twenty year plan, maybe you are investing to fund retirement, or investing to create financial independence, then you might want to invest in companies with high growth potential.
Diversify, diversify and diversify
- Diversify your investments in three ways
- Make sure you have lots of different stocks in your portfolio.
- Make sure you have diversification of the type of stocks you hold — don’t invest all your money in one sector, or even in one territory. Try and ensure your portfolio consists of non-correlated stocks, meaning that they are not reliant on the same macroeconomic trends
- Diversify over time. If you have a lump sum, even after you have had a go using a modest amount of money, don’t then throw all your money at the stock market. You could be unlucky and coincide your buying with a stock market crash. If you have a lump sum, drip feed it into your portfolio over two or three years. If instead, you invest a proportion of your income every month, then you will be following this rule by default, anyway.
Not a bank account
Don’t ever, use your portfolio as a bank account. Your portfolio is not something to dip into from time to time, when you need money
Time to sell
And finally, linked with the above: sell because market conditions are appropriate, not because you need the cash. Let’s say you have a target date to either sell your portfolio or reinvest it into dividend paying stocks. Let’s say that target date is in 20 years. Make this a loose target. Sell within two or three years either before or after your target date, when you feel market conditions are right. If instead, you religiously stick to a certain date, that may coincide with weak stock market conditions. Incidentally, this is one of the big problems with pensions — a retirement date is set in stone, meaning creating all kinds of timing challenges regarding liquidating your pension.
Don’t forget the football
Investing is fun, but remember, the real purpose is to make money so you can have fun with the profits. Good luck and enjoy.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees