As of the start of COVID investing has gained a lot of popularity. Many people became investors. A lot of money was made. While many gamblers got burnt.
It is never too late to start investing in my view. Which is why today I want to cover the basics of how to start investing.
Investing doesn’t always need to be a gamble. There are a number of ways you can invest and do so in a relatively safe way.
If investing is something you personally are interested in – simply follow the below framework and enjoy the fruits of your labor in years to come.
1. decide on your investing goals
The journey always starts with you making a decision – where do you want to arrive? Only you can answer the above and say what it is that you want to achieve. One thing that you always have to take into the consideration – how much time are you ready to invest your money for.
Most frequent goals that people set for themselves are – retirement, buying a home or simply to have more cash available to them. No matter what your personal objective is – investing can be tailored to your personal needs and circumstance.
The really important question when it comes to investing is the time. When you are looking to invest for your retirement – there is more time for your investments to mature. The time also helps in those cases when the market unexpectedly drops.
On the flip side – if you are looking to buy a home in the next 3 years you might want to make your money work for you while you don’t want to accept too much risk.
2. choose investing platform and register an account
Next step – is deciding on the broker you are going to use. There are hundreds of options available for you to pick from. Not all of these however are the same.
Firstly, make sure the broker you chose is registered with FCA if you are investing in the UK. This step will give you confidence that your money is insured. In the unlikely event of the investment institution going bankrupt – you will be covered up to £85,000.
Secondly, understand the fees that the broker is charging you. The fees can vary from a flat per transaction fee, to depositing and withdrawing money fees, to fees to make your transactions over phone, etc.
Get a good understanding of these and choose the platform that works the best for you. Some of the newer online only investment solutions offer very low fee structures that makes these look extremely attractive.
Thirdly, look into the types of products you can invest into. The broader the offering, the easier it will be for you to invest the way you want to do it.
Fourthly, read the reviews of the broker you choose. Understand the levels of their customer service, the usability of their online platform or ideally the mobile app. Surprisingly, not all of these are of great quality.
If you aren’t sure where to start – HL is a decent option in my view however comes with higher fees that some of the competitors do. Deposit money into the account once you applied and have been approved.
For those in the UK – I would recommend investing through an ISA as you can save yourself a lot of money on taxes this way.
3. pick an investment in line with your time constraints and risk tolerance
Next, it’s the most exciting part – time to pick which investments your money will go against. This is where understanding your goals and time will be critical.
For those with shorter term time frame – I would suggest looking into bonds or savings accounts. These currently are offering reasonable returns. However the key here is knowing that you are not risking to lose the initial capital you are investing.
For those looking to invest for longer term yet who would search in google “investing for beginners” – my recommendation would be to go with an ETF that tracks an index fund. This is by far the cheapest way to invest due to relatively small fees these types of investments charge.
It is also a well known fact – long term investors who pick their own stocks would struggle to beat the performance of an index fund. Also, majority actively managed funds underperform index investing in the long run.
Company called Vanguard is well known for providing the cheapest ETFs on the market. They offer a wide range of products to pick from. If you decide to invest with HL – these are couple of products you can look into in more detail:
- VUAG
- VUSA
- VUKE
- VUKG
For those who are more advanced and feel comfortable picking their own stocks – you can look into building a diversified dividend paying portfolio and mixing that with some growth stocks to get exposure to the benefits of both worlds.
4. diversify your portfolio
For those who start their journey with small portfolio and grow it over time – I would suggest sticking with one index fund in the beginning. Once your portfolio starts becoming larger – consider diversifying by adding a different type of index into the mix.
Some strategies include mixing up developed market indexes with emerging markets where more growth can happen. I personally would not allocate too much money to those as safety is the key for those investing for the long game.
My personal favourite is NIFTY 50. This tracks the 50 biggest Indian companies. The past performance is not guaranteed to repeat itself yet I see a lot more potential for this market.
5. reinvest your dividends
Depending which securities you decide to go ahead with – you might be paid a dividend for holding these. Dividends might be payed monthly, quarterly, biannual or annually.
If you are investing for the long term – this will make a massive difference to your portfolio value. Reinvesting dividends can make your portfolio grow significantly over long periods of time.
If you look at the image above – you can see how big of a difference reinvesting dividends can make over a longer period of time. $10,000 invested into S&P500 in 1960 would be worth nearly half a million by 2017.
If however you were to reinvest your dividends back into the same ETF – this would be worth over $2,500,000. The difference is incredible and could really make a massive difference to your retirement pot.
summary
Investing is a great way to start building a source of passive income for the retirement. This can be the difference between being able to enjoy your life and having to manage your expenses.
One thing that I often hear people say – I don’t have money to be able to start investing yet. My answer to this is – it’s not about how much money you can put in, it’s how much time you give your investments to compound and grow.
On top of that – many investment platforms offer fractional investing. This is where you can buy a part of a share that is outside of your budget. For example, if a share costs £100 – you can buy 15% of this for £15. This would show up on your account as 0.15.
Do not confuse investing and active trading. From my personal experience – active trading requires a lot of time and the actual returns are not really worth the time spent. Pick a solid and sound investments and let the time take care of the rest.