Getting started with investing can be a daunting process, but following a few simple rules will help you succeed.
These top five tips from the experts can assist you in building a portfolio that grows over time and withstands some of the ups and downs of the stock market.
Start small and regular
Setting up a monthly direct debit into your investment account means you’re automatically putting money into investments without thinking about it.
Myron Jobson, personal finance analyst at DIY investment group Interactive Investor, says this approach can also help newer investors ride out market volatility.
‘This strategy involves investing a fixed amount at regular intervals regardless of market conditions,’ he says. ‘When prices are low, your money buys more units. When prices are high, it buys fewer.
‘Over time, this helps smooth out the highs and lows of the market, lowering the average cost per unit and reducing the risk of entering the market at an unfavourable moment.’
Diversify
Putting all your eggs in one basket is a risky strategy with investments because you could end up picking a company, sector of industry, type of asset or an area of the world where asset prices fall quickly.
Instead, putting together a diverse portfolio is likely to provide a more consistent performance over time.
‘When one asset class is performing poorly, others may be flourishing,’ says Marcus Brookes, chief investment officer at wealth management group Quilter Investors.
‘A diversified portfolio including a range of different assets can help iron out the ups and downs and avoid exposing your portfolio to undue risk.’
It can be tricky to create a diversified portfolio when buying your own shares, but by using funds where your money is pooled with others to buy investments you can get ready-made diversified portfolios with smaller amounts of money.
Multi-asset funds give you a mix of bonds, shares and other assets, while you can also buy funds that track a large portfolio of shares, such as the FTSE 100 or S&P 500.
These tracker funds typically have cheaper fees than those run by expert managers.
Let time do its work
Investment is a long game. Starting as early as you can means even small amounts of money can make a big difference.
Jonathan Watts-Lay, director of Wealth At Work, calculates that someone aged 25 who contributes £2,400 a year to a pension for 30 years could have £167,426. If they waited ten years, they would have to more than double their contribution to £4,825 a year to receive the same amount.
‘Starting early allows savings to grow over time and benefit from the power of compounding,’ he says. Compounding, which Einstein called the eighth wonder of the world, is the way in which returns on investment are reinvested, causing your money to grow more quickly over time.
Take (appropriate) risk
Investing can be frightening for those who are new to it. The value of your money can go down as well as up, and it’s easy to decide to save your money in the bank instead, where you know that prices cannot fall.
However, studies of historical performance of different assets, such as the Barclays Equity Gilt Study, show that over most longer periods of time, investments will perform better than cash savings.
In many cases, your cash savings will lose value because of inflation outstripping the interest rates you can get in the bank.
Craig Rickman, personal finance expert at Interactive Investor, says our emotions sometimes hold us back from taking the right level of risk for our portfolios.
Craig cites an Oxford Risk study that shows 32 per cent of us have the capacity to take on more financial risk than we do.
‘While people should only take on as much risk as is right for them, short-term emotional barriers often mean we don’t take the risk that’s right for long-term needs,’ he says. ‘We urgently need radical action to address this, or risk more people scraping by in retirement.’
Ignore the noise
Social media is flooded with hype about investments, with the government trying to crack down on illegal ‘finfluencers’ who can push people into unsuitable investments.
Recent examples of social media noise include the excitement over Krispy Kreme, the doughnut maker whose shares rose hugely after a social media frenzy only to sink back after disappointing earnings.
Susannah Streeter from DIY investment group Hargreaves Lansdown urges successful investors must be careful ‘not to get swept up in any hype’.
‘It’s really important to ignore FOMO pressure and resist chasing after hot stocks,’ she says.
‘After all, if there’s a stampede of investors going after one particular investment, they’re probably buying it at a price higher than it is worth.’
