This is intended as an overview of investing for beginners – how to invest, and some of the more common methods. Never invest money that you cannot afford to lose.
Table of contents
Introduction
Ways of investing
ETFs and funds
Stock picking
CFDs/leveraged trading
Where to invest
How to invest
Don’t forget your pension
Appetite for risk
Don’t forget the emergency fund
A warning for alternative investments
Using a financial advisor
Final thoughts
Introduction
One of a few things come to mind when most people think about investing; day traders throwing themselves off rooftops, wealthy folk sitting around a men’s club reading the Financial Times, or more recently – meme stocks bringing down the establishment. These are the extreme fringes, and are far from the reality for most investors.
Many of us are already exposed to the stock market through our pensions, so you’re likely already invested whether you realise it or not. Before we delve any deeper, I’d like you to take a look at Vanguard 100’s performance over the last 11 years.
£10,000 invested in 2012 would have given you over £25,000 in 2022 – 250%, or an average yearly compound return of around 10%.
This is the beauty of the compound interest you can get with long-term investing. Some people will tell you that investing is risky – and it is in the short term. Look at the start of the Corona virus outbreak at the beginning of 2020; you could have lost 30-40% of your investments if you had just started your journey. That ‘blip’ is barely noticeable over the long term.
Ways of investing
First and foremost – use your ISA allowance every year; you can put in up to £20,000. Your ISA wrapper means that you won’t pay any capital gains tax on your profits, which could be a hefty amount after a long period. If you are under 40 then you can also have a LISA (lifetime ISA) – where you can pay in up to £4,000 each year (up to the age of 40) and the government will add 25% of your contribution.
The only downside of a LISA is that you forfeit 25% of your total if you cash in before you are 60, or your aren’t spending the money on your first home. So if you are reasonably sure that you won’t need the money until either of these two things are true, maxing out your LISA every year could be a very smart move.
ETFs (exchange traded funds) and mutual funds
These should probably be default choice for 99% of the population (and arguably a good chunk of the remaining 1%).
ETFs are an actively or passively managed portfolio of companies and other securities. Active funds have managers who will buy and sell within that fund, attempting to maximise its growth; they have higher fees to pay the fund managers. Passive funds automatically track market indices and are among the cheapst funds available. You would be forgiven for thinking that actively managed funds would net you the best return – but in reality most managers fail to beat passive trackers.
Mutual funds are not exchange traded but these days are otherwise similar. The main difference is that they can be either open-ended (trading is between investors and the fund and the availability is limitless), or closed-end (there are a set number of shares).
ETFs and funds can be composed of many things, including various market trackers (UK, US, EU, Japan, etc). Those tracking indices are generally the least volatile – they normally have lower fees as they aren’t actively managed. Deposit your money and leave it to do its thing! You won’t be the wolf of wall street, but it’s less risky and you can reasonably expect a decent return in the long run.
A market index is a list of companies who meet set criteria. Allocations can vary but they are generally weighted by the sizes of the companies listed. For example, a Nasdaq index tracker would contain a lot more Apple than Docusign. You’ve probably seen them mentioned at some point, especially if you listen to the news. Amongst others, America has the S&P, Nasdaq, and NYSE; the UK has the FTSE 100, 250, and AIM. There’s a full list here, but most generally only care about a handful.
The FTSE All-World index is a popular global option, composed of over 17,000 companies across 49 countries.
You can open up an ISA and set a monthly contribution with many providers, such as Vanguard, Fidelity, etc.
If you haven’t already guessed, I think that a passive indice-tracking ETF or fund is the best choice for most people with some time ahead of them.
Stock picking
The eminently riskier choice – picking individual companies and holding their shares. The fewer the number of companies you pick, the greater the volatility and risk. If one of the 20 companies in which you have (evenly) invested goes bust, you just lost 5% of your money. You could lose a lot more if for example you’ve only invested in tech companies and the sentiment changes. That’s why it’s important to diversify across markets.
This is far less of an issue with a global ETF composed of thousands of different companies.
You can make a very decent return if you do your research (and are very lucky), but you can also lose much of what you invest. If you are convinced that you can pick the Amazons and Apples ahead of the curve then you can always create a free ‘play’ account with companies such as Trading 212. Such accounts allow you to dabble in the market with some make-believe money.
Be careful with this. It’s very easy to get lucky and think you are the next Warren Buffett.
CFD (contract for difference) leveraged trading
Please don’t do this. CFD trading is a leveraged system where you can multiply your profits and your losses many times over. It’s very popular with day and forex (currency exchange) traders.
When you hear horror stories of people losing their home on the stock market – this is probably what they were doing. You can lose more than you put in. 70-90% of those using CDFs lose money.
Where to invest
The easiest and most common place to invest is an online trading platform. You can search through the various ETFs, funds, and shares available on that provider. For most people, any of the main companies will have what you want. Some of the big names include:
Vanguard
AJ Bell
iWeb
Trading 212
Shop around and compare annual platform and trading fees. Small percentage differences may seem trivial, but they add up over time.
If you decide to use Trading 212, feel free to use my referral link (we both get a free share worth up to £100).
How to invest
Buying or selling normally incurs a charge, perhaps £5-15 per trade. However some of the platforms waive that fee if your are making regular contributions. For example, if you are putting £100 a month into a particular fund or are purchasing set shares.
This allows the provider to bundle their traders together and save on overheads, but more importantly it can save you a fortune. A £15 charge for investing £100 would put you 15% in the red from day one.
You can also invest less frequently; put your money aside and invest a few times a year.
Don’t forget your pension
If you won’t need to touch the money until you retire then your pension is likely the most cost-effective way to invest. Salary sacrifice will reduce the tax you pay for your regular salary. This is particularly attractive to big earners in a high tax bracket.
At the very least you will probably want to contribute up to the level your employer will match.
Many workplace pensions will allow you to select from an array of funds – some of them are likely to suit your purposes. You won’t be picking individual shares, but for most people that’s a good thing.
Appetite for risk
You are likely happy to ride the ups and downs of the market if you’re fresh to the work force with decades ahead of you. But what if you’re not?
Those a bit older might want to play it a little safer.
That’s where things like bond allocations can be considered. Bonds are basically loan agreements with governments and companies. They are generally more stable than shares, although you usually get a lower return.
This is where funds such as Vanguard’s Life Strategy can come in. They have a range containing 20-100% of equity (shares) allocation – the rest is in bonds. The closer you are to retirement, the more bonds you may want.
I appreciate that I mention Vanguard’s offerings consistently in this overview. They are one of the most respected low-cost options, and I have no affiliation.
Don’t forget the emergency fund
It’s great to invest, but make sure you have something set aside for unexpected costs. You don’t want to be forced to sell investments if the market is down.
Suggestions vary for how large this rainy day pot should be, but between 3 and 6 month’s with of bills is a good start. Look around for the best bank saving rate to reduce the rate that inflations eats away as much as possible.
A warning for alternative Investments
You’ve most likely seen adverts for whiskey, wine, and property investment companies promising excellent returns. If it seems too good to be true, it probably is. Always thoroughly investigate a company if you’re not using a well-known and trusted platform.
This goes triple for cryptocurrency. Many people have experienced the fear of missing out and lost money with scams. If you truly must dabble with digital currency, make sure it’s a very small amount of your portfolio. Purchasing coins directly from a reputable exchange is likely safer than using a company who will ‘hold them for you’.
Crypto is an unproductive asset, and most people buy some in hopes it will appreciate. This makes it speculation rather than investment, not something I’ve ever practiced and beyond the scope of this article.
Using a financial advisor
You can always turn to a professional if you really don’t want to do the legwork yourself. Many will require you to have a minimum amount, and you’ll need to pay for the privilege. This is often a percentage of your portfolio per annum.
Use an independent financial advisor if you go down this route. They won’t be as restricted in their options.
Final thoughts
Investing can be a great way to gain interest in the long term. You need to understand that there are always risks and you could lose your money – but it’s less of risk using established firms with funds and market index ETFs.
Use your ISA allowance first, unless you’re adding to your pension.
Don’t trust off-market investment schemes by default. Assume it’s a scam until you can satisfy yourself otherwise. If in doubt, seek advice.
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