Are you looking to start investing? The first step can often be the most daunting. To help you get it right, we have curated the best investment tips for beginners from leading experts and institutions in the field to get you off on the right foot.
What is Investing?
Investing is a way of seeing a return on your money by making a purchase that goes on to increase in value or produce interest payments. Common investments include fixed-income deposits, shares, and property, but investment could also be made in a piece of art or a classic car.
This guide will primarily focus on investing in the stock market. That means buying and selling stocks and shares. The stock market is the exchange where the trading of stocks and shares takes place. A share is a fractionated unit of a business.
Buying shares on the stock market means taking an equitable stake in the relevant company. Profit can derive from selling shares at a profit, or by earning dividends from your share in a company.
How Much Money Do I Need to Start Investing?
You can start investing with as little or as much money as you like. As Sam Dunn writes for the consumer website MoneySavingExpert: “Too many people think you need to have a load of cash to be able to invest in the stock market – you don’t, and many smaller investors who ‘drip-feed’ in small sums on a regular basis can do much better than those who simply dump a big lump sum into the market.”
Some experts recommend investing a percentage of post-tax income. Mark Henry, founder and CEO at Alloy Wealth Management told Fortune: “Ideally, you’ll invest somewhere around 15%–25% of your post-tax income, if you need to start smaller and work your way up to that goal, that’s fine. The important part is that you actually start.”
Before deciding to invest your money, be mindful of the risks involved, and take into account your personal financial circumstances and budgeting requirements.
Smart investment is informed by key principles that can underwrite and inform your investment decisions. Merryn Somerset Webb, editor-in-chief of MoneyWeek and columnist for the Financial Times recommends investors abide by 4 “time-proven” principles:
- Keep your costs down
- Beating inflation is the only benchmark that matters
- Buy low, sell high
- Don’t stick all your eggs in one basket (but don’t have too many baskets either).
The advice is mirrored by asset management firm Vanguard which says investors should create clear, appropriate investment goals, develop a suitable asset allocation using broadly diversified funds, minimize cost and maintain perspective and long-term discipline.
Make Sure to Diversify
A diverse portfolio contains a range of different assets that perform differently against the same or similar market conditions. The importance of maintaining a diverse portfolio that spreads risk cannot be overstated.
As The Times’ Money Mentor Assistant Editor Katherine Denham puts it: “It means that no matter how the economy is doing, some types of investments will thrive.”
Investments can be diversified according to the asset class, sector and geography. Investors should take care not to obtain too many separate holdings, because of the difficulties that will arise in keeping track of them. This risk of overreaching is one of many that lead people to employ the services of financial advisors to help manage investments.
Should I Use A Financial Advisor to Invest?
There are a number of benefits to procuring the services of a financial adviser to assist with investing.
Advice by Money Helper, a UK Government advice service, says: “If you buy an investment product based on financial advice and a recommendation, you’re much more likely to get a product that meets your needs and which is suitable for your particular circumstances.”
And that: “Advisers can provide expert guidance when you have important and potentially difficult financial decisions to make, such as approaching retirement. An adviser can put a plan together to help meet your short, medium and long-term goals. They can then keep you on track to reach those goals and make changes where necessary. If you have money to invest, an adviser can make sure that it works hard for you and that you make the most of the tax reliefs and allowances available.”
Not taking advice means not considering all the available options, and thereby running the risk of misunderstanding complex financial products. The cost of fees should be weighed up against the larger cost of getting it wrong, click here to arrange an introductory meeting with a financial advisor.
As Forbes advises: “Managing your money and investment portfolio can be like a second job — a second job you may not want. If you don’t have time for research and monitoring your portfolio, you can retain an advisor to do it for you. Your advisor does the tedious work and you get involved when it’s decision time”
“Similarly, you might not feel completely comfortable making investing decisions. After all, investing is a complex subject. A good advisor can support solid decision-making and help educate you on best practices of money management.”
Investors should be clear about what their goals are and what they are setting out to achieve. Understanding goals will help to inform the construction of a portfolio that works to meet your needs.
Those could be anything from securing a nest egg for retirement or starting a business. Having a clear aim will make the roadmap that much clearer. As Macos Cabello of CNET writes: “Establishing clear objectives and revisiting them annually, will help inform your timing, strategy and appetite for risk.”
Investing isn’t just about buying and selling individual stocks through apps or brokerages. More and more investors are now turning to funds, particularly in these turbulent market conditions.
Funds are designed to give returns that aren’t held hostage to wild deviations that can occur to particular stocks in the market. In the long run, the market will often outperform individual investments.
Don’t invest what you can’t afford to lose. There will always be risks associated with investments, and we should be mindful of the possibility that invested money can be lost. That latent risk is another factor driving the popularity of funds.
Mutual fund investing
Investopedia defines a mutual fund as a “financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.”
This means there are a number of advantages to mutual funds, including advanced portfolio management, dividend reinvestment, risk reduction, convenience and low minimum investment or barrier to entry.
Mutual funds can reduce overall risk by making investments ranging typically from 50 to over 200 securities, meaning if one suffers, the whole stand a better chance of outperforming the individual stock or even the market as a whole. Schwab.com writes mutual funds are popular with investors looking to beat the market as “actively managed funds acquired as part of a specific strategy may complement index funds in a portfolio, and help to reduce downside risk and mitigate market volatility.” Moreover, mutual funds are highly liquid, meaning they can be easily sold and exchanged back for cash.
Before making the move into mutual funds you should be clear about your near term and long term goals. It’s also prudent to consider a managed fund. As per Forbes Adviser: “Actively managed mutual funds aim to beat the performance of an underlying index. They usually charge higher fees and offer the potential for richer returns. Passively managed mutual funds—or index funds—aim to duplicate the performance of an underlying index.”
Is Now a Good Time to Start Investing?
In spite of the present turbulence in the market, there are advantages to entering the market at this time. Not least because a recent drop in price to earning P/E presents a window of opportunity for new investors.
Investopedia defines a price-to-earning ratio as “the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.”
Buying now in the midst of an asset drop could bear fruit in the long term as markets recover and share prices rise. As Forbes reports: “It’s simple math and highlights the value of dollar-cost averaging. When stocks are cheap, if you’re putting in a specific amount of money each month, then you will gain more shares than when stocks are expensive. If you invest $500 in a market index fund when it’s priced at $250 per share, then you gain two shares. If that rises to $350, then you gain about 1.4 shares. Again, simple math.”
High inflation might have served to hike the price of goods in our shops, but it has, at least in the short-term, worked to devalue the price of stocks. According to financial planner Ryan Derousseau: “Instead of worrying about the right time to dive in, remember that the right time is typically now. And, with the market slightly cheaper than we’ve seen recently, what better time to start?”
Before You Begin…
Investments should not be entered into lightly. Before starting your investment journey, be prudent in taking advice from a financial adviser, and be clear in your own mind as to your long-term goals.