Beginner’s guide to investing part 3: five tips for investing

In part 3 of my beginners’ guide to investing in shares, I have some suggestions. Here are five tips to investing in shares.

Article updated: 16 October 2020 10:00am Author: Michael Baxter

In part one in this series of a beginner’s guide to investing, I started with all those questions about investing that you dare not ask because you thought it would be too simple.  In part two, I looked at risk versus volatility and why you are investing. 

Now let us get straight into tips

Tip one in the beginner’s guide to investing in shares: the three Rs

The three Rs to investing are research, research and research. By that I mean, read extensively. Read the FT as much as you can, read investment publications such as Investors Chronicle and read editorial here. Newspaper columns such as Questor in the Telegraph or Tempus in the Times, are worth reading too.

Except for The Share Centre material, all these publications are premium. Subscribing to all of them is quite expensive. I recommend subscribing to one or two but keeping a close eye on the others and buy a copy if they cover a topic that interests you.
But never, ever, take our word for it. If I wax lyrical about a company, if The Share Centre describes a company as a buy, if Investors Chronicle, Questor or Tempus tip a stock, don’t take this as an invitation to buy, at the most, take this as a reason to do more research.

If you are thinking of buying into a stock, read what specialist publications are saying. Read up on forecasts for that sector. And very importantly, read what critics of that stock say.

And if you can, try out the product—more on that next week.

Look at the balance sheet, look at the fundamentals, at assets to liabilities, current assets to current liabilities, net debt, revenue and profit growth. But to an extent, I would expect the tipsters to have taken all this into account.

Be your person and read extensively.

Put money at stake

The following tip is controversial. Put money at stake. By all means, practice with a dummy portfolio before you get stuck in, but once you have your money at stake, the above research becomes an order of magnitude more interesting.

We are human. We don’t absorb everything we read. But we absorb an awful lot more when our money is on the table.

Research, research and research, becomes more meaningful when we are investing our own money.

I had never read the FT properly before I first invested. Once I took to the world of investing, I decided it was the best newspaper in the world. I still think that, and not only because of its editorial on investing. I have become an FT fan, full stop.

The three Ds

The three Ds are diversification, diversification and diversification. It’s as important as research. Hold lots of stocks in your portfolio.

A lot of people think investing in shares is risky.

But providing you follow specific rules, read up about my comments on risk versus volatility from part II, and practice what it preaches and then diversify, like I am suggesting here, I don’t think investing is risky.

But there is more to diversifying then buying lots of different companies.

Go for different companies

If you invest in several companies, but they are all quite similar, maybe specialising in similar products or targeting similar markets, then that is not proper diversification. Go for at least some companies that are as different as possible compared to other companies in your portfolio. For example, you may look at two companies that in some ways are quite similar, but focus on different countries.

Non-correlated risk

This is similar to the point above, but even companies that have entirely different exposure, can be hit in tandem when something goes wrong.

Think about the 2008 crash and the Covid crisis. Many companies operating in entirely different markets, suffered equally severely. Some companies did well while others suffered. After 2008, tech stocks recovered quickly. Right now, amid the Covid crisis, some countries are doing better than others.

Try and include companies in your portfolio that are non-correlated

Diversification over time/drip feed and keeping some powder dry

But imagine you do all the above. Imagine you have a lump sum and you invest it all across a non-correlated, diverse range of companies, and then the next day there is a crisis.

Your portfolio could lose value rapidly and take several years to recover.
You can reduce this risk by investing your money gradually. With your lump sum, invest it over three or four years, or even longer — drip feed it.

Also, keep some cash back for opportunities. I will say more about that in part five.
If instead you invest a set amount every month, or every few months, you achieve diversity over time anyway.

Sell when you think the time is right, not when you need the money

And finally, to repeat from part two, plan long-term. Even shares in good companies can go up and down in the short term. Quality will, as the saying goes, out. Quality will out, but in the long run.

And that takes me to selling. To repeat from part two, sell when you think market conditions and a company’s fundamentals suggest it is a good time to sell, not because you need a deadline. Never set yourself a date to sell, for example ‘I am going to sell on January 1st 2040, because I want to retire that day’. Instead set a date when you might sell. You might want to make that date 2037. And sell the first time after that date which you think suggest is a good time to sell — perhaps stock markets have hit an all-time high, or stocks in your portfolio have done so well that their P/E ratios look stretched. It is not likely that this optimal date will apply simultaneously to all your stocks. If you are thinking of selling all the stocks in your portfolio on the same day, look at each stock individually and clarify that for each particular company, it is a good time to sell.

For part one and part two in the beginner’s guide to investing

A beginners guide to investing in shares

Are you new to investing? This is part one in a five-part series, starting with all those questions about investing that you dare not ask because you thought it would be too simple.

Risk versus volatility and why you are investing; a beginner’s guide to investing part 2

In this second part, to the beginner’s guide to investing, I look at why and how. Why are you investing? How you balance risk and volatility depends on what you want to achieve.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.