Making your first investment
Investing in the stock market for the first time is daunting. Crypto-this and equity-that, there are endless choices, lots of jargon and piles of experts who may or may not be trustworthy. The good news is that you can get going in a simple and sensible way with small amounts of money and time.
Actually, behind all the BS, it's not that complex. You want to invest in a decent spread of companies and investments which you think will make money and grow in the future. As a first-timer it makes sense to think about 'funds'. Fund managers are like the Dragons on Dragon's Den. They pick a suite of investments which they like and check and monitor them for you.
You can go through the key fundamentals to get you started or click here to begin comparing out best buys.
1. Cash Is No Longer King
Cash rates are horribly low today – even historically, horribly low! And this isn’t likely to change anytime soon. The stock market is likely to make your money work harder over the long-term but it’s not guaranteed at all. Before getting started its worth saving or setting aside 3-6 months' salary to cover any unforeseen emergencies.
Currently the best rates on easy access cash are about 1.3%. Not exactly earth shattering. Ramps up to about 2% if you stick it away for 12 months in a 1 year fixed term bond. Shop around. Loyalty does not typically pay when it comes to banks.
2. You Do Understand Shares!
Investing is not hard. Companies need money to make things and grow. They give up portions of their business to shareholders in exchange for cash. You're simply looking to back businesses which will make more money and grow in the future. Amazon, Apple, Microsoft and Samsung are some examples of the world's largest companies which are listed on stock exchanges.
If these companies have excess cash in the bank at the end of the year they can divvy it up and pay it out to shareholders as a pat on the head and a thanks. These payments are called dividends.
We basically invest in shares because we either think they will grow or because we want the cash payments they make us. Or both.
3. Eggs and Baskets
Diversification is key. This is simply spreading your investments around to protect you from potential market wobbles. If you just buy one company, you are super exposed to their fortunes and that can quickly go wrong. Investing in a fund allows you to get around this. This is like a basket of about 50 shares and it just means that all of your eggs are not in one basket.
You can either pick a range of funds - most people will have about 8-15 of them - or if you want super simple, you can choose just one 'multi-asset' fund which is like an investment ready-meal. You'll get a crafted mix of investments from all around the world which is managed and tweaked on an ongoing basis for you. Super low maintenance and easy to get going.
Unfortunately, stock market returns can not be guaranteed. We can assess likelihoods and probabilities, but no promises. Those products that do offer guarantees are very expensive and it all gets a bit too much like alchemy - we're not fans of products which are over-engineered as they tend to blow up or cost more than is sensible
Volatility is to be expected - and it's also why time frames are so crucial. A Barclays Equity and Gilt Survey in 2015 showed that over a 10 year period, stocks and shares are 90% more likely to do better than cash and over an 18 year period it’s a massive 99%. As long as you are thinking long term you reduce the risk of being caught out in a downturn.
The only major risk is being a forced seller in rubbish markets because you need the cash. If you don't need to sell when there is an inevitable downturn, you are fine.
5. Where to Buy?
As for where to go to buy the investments and funds, think about an “investment supermarket”. For less confident folk who like the comfort of big brands we like Hargreaves Lansdown or big brand Aviva.
Have a look at our Best Buys pages for those options which we think suit novices. Expect to pay between about £10 and £12 for every £1,000 you invest each year.
Alternatively, you could consider a robo adviser. Finance's digital answer to the consumer desire to have something a bit more convenient and simple. These are simply online investment services which typically ask you about 10-15 simple questions and then allocates you to a suitable basket of investments. And manages these for you on an ongoing basis.
The big plus for less confident investors is that you don't have to pick all the individual investments – they do it for you. Simples!
6. Show Me How - A Video Journal
Learn best by watching someone else? Follow Erica as she embarks on her investment journey for the very first time, looking for the best way to invest £1,000.
Featuring Erica Whyte, spokesperson for Charles Stanley.
1. It's Not as Scary as You Think
Investing doesn’t have to be complicated. We have so many ways to access the markets, where investment specialists will do a lot of the selection and analysis for us. There are pre-packaged collections of investments curated by an expert that you can pick based on what you are comfortable with. These are called Funds. They're like the 'mixed dozens' of the investing world where you say "look mate I just want something decent to drink can you please sort it out for me or I will wilt under the choice, OK!?"
Risk is part of investing in the stock markets, but it can be managed. When it comes to investments, risk is more about volatility than it is "putting it all on black". If you invest in the world's biggest brands, they're not all going to go POP are they? They just might all have a bad year when the global economy has a wobble. We just need to be comfortable with what we are willing to tolerate and this is mostly about thinking about timeframes.
The shorter the time frames the riskier it looks. This is because you don't have time on your side to sail through the tricky times and wait for the turbulence to stop. So, here's a rule of thumb. If you're looking for a home for your money for 4 years or less we wouldn't suggest the stock market. But if you're thinking longer-term then it makes sense to consider shares. And we'd go further. If you're saving for at least 10 years it starts to become illogical NOT to invest in shares.
2. How Might Different Investments Behave?
We have already suggested funds. But there are many types of funds to choose from.
Here are the main ‘flavours’ of fund out there:
Bonds are the man/woman your mother wanted you to marry. Shares are the bad boy/girl your 19 year old self wanted to marry. Exciting. Volatile. And sometimes painful!
Owning a bond is kind of getting an IOU from a government or a company – you buy their bond and you’re lending them money. The dicier the prospect of getting your cash back, the more ‘interest’ they will pay you to compensate for the risk. So an Ecuadorian mining company bond would pay a gazillion times more than the relatively staid UK Government, for example. It’s a riskier loan so they’ll compensate you more for taking this extra risk. That’s the deal.
Shares – also known in poncey finance speak as ‘equities’ or ‘stocks’. If you own shares, you buy little pieces of the world’s biggest companies. And tie your fortunes to theirs. As a rule of thumb, most ‘equity’ funds will have about 50 shares in them, although some managers have fewer, sticking to their convictions more about which shares are duds and which ones are winners.
Bond or shares? Many suggest diversification, which in this case means a sort-of Combo Meal of bonds and shares. Over the long-term bonds are seen as safer and less choppy than shares but many believe they will make you less over the long-run too.
As a rule of thumb, if you’re a spring chicken and investing for ages in the future, you should probably look at mostly shares. If you’re getting on and likely to need your money soon, people typically prefer to have more in bonds because they’re less likely to crash as dramatically as shares, leaving you high and dry if you need to cash in your investments.
UK or global? Although there’s a documented tendency for us to stay close to home, most people suggest looking overseas too. Brexit uncertainty is not really doing British based companies many favours in terms of their appeal to global investors right now. Spread your bets. Each year, we see a few countries have their moment in the sun. ‘Emerging Markets’ are ‘spicy’, but they can have cracking years. Poland went gangbusters in 2017! So did China. When they’re good, they’re lovely and when they’re bad, they’re horrid. So spread your bets and make sure your time frames are long enough to ride out the bad years.
If you really understand the difference between bitcoin and Ethereum and can make a reasoned argument about why they will go up in value - fine. If you can't and you just feel greedy......you may as well go to the casino.
It might well go up. But it could also go pop. Too risky for us.
1. What Should I Pay?
All in expect to pay between about £10 and £12 for every £1,000 you invest each year. This is to cover the administration and service fees, as well as the investment charges.
Roughly speaking, an investment platform or service costs about 0.25% - 0.45% in administration fees. If you use funds, expect to pay a fund manager about 0.75% a year although it depends on their style. Cheaper funds called 'passive funds' cost a lot less.
If you are using a financial adviser expect to pay about 0.5% - 1% a year on an ongoing basis. Hourly rates range from about £125 to £250. Depends most on the experience and where you live. Ask about any exit fees. Some of the largest brands are still dodgy on being clear about these.
2. What About Returns?
Markets move up and down. We've all seen CRASH headlines. But the key to this is time.You only lose money if you're a forced seller. If you can sit through a bad year and ride it out - you'll be fine. You should really have 5 years or more to work with.
Lots of you tell us you dont have any idea of what might be in store.It's far from perfect but if you look at the main UK stock market - the FTSE 100 - the worst we can remember was the global crisis in 2008 when it lost 30%. But the following year it went back up by 29%.
We know time works in our favour, and you may recall reading about many stock crashes over the last 30 years. But consider this. If you had put £1 into cash in 1983 it would be worth about £1.33 today. That same £1 into the British stockmarket would now be worth closer to £11.
3. You Don't Need Loads To Start
The detail's in our Best Buy (https://www.boringmoney.co.uk/best-buys/all-providers/) pages - but most providers will let you get going with a direct debit of £50 a month. Some set this at a minimum of £25. And Wealthify even lets you stick a toe in the water from £1.
4. Ten Minute Listen
This podcast walks through the basics in 10 minutes. All you need to know to get going, click here to given it a listen.
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