How to Get Started With Investing

Have you ever wanted to start investing, but not known how? Perhaps you’ve observed that most successful people invest, but you also know friends who’ve lost money. It’s hard to see where to begin…

Most of us follow one of two routes with investing. We’re either paralysed by the jargon and do nothing, or we employ short-term thinking which leaves us worse-off.

Neither of these strategies are successful. We want to share a third way.

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In some sense, we're all investors. Investing simply involves putting your assets somewhere. If you do nothing, you’re choosing to keep your assets in your current account. You’re an investor, but the ‘somewhere’ you’ve chosen for your assets is unproductive; it’s not generating much return. There are better places to invest.

Some store their assets in property, others own businesses. And some invest in the stock market, which is our focus here. Why? Because it’s the least well-understood, the easiest to make work, and the most appealing over the long-term.

Stock Market Investing

When you mention the stock market, the first image that may come to mind is of people in a loud room shouting down the phone. They are traders, not investors. Investors have a long-term view.

Stock market investors use their money to buy shares of companies. Buying shares makes you a part-owner of a business. The idea is that these shares will increase in value as the underlying business grows.

At this point, you might ask, ‘how can I know which shares to buy?’. A good question; the answer is that you don’t have to.

Even professional portfolio managers (the name given to stock market investors) struggle to pick the right shares because the future is uncertain. And the difficulty is not just in selecting the best companies, but in selecting the right companies at the right price.

You might look at Microsoft and see a great business. And you might look at Royal Mail and see a weak one. But the investor needs to understand not only the better business, but the one which is better value for money.

To do this consistently is hard. For the non-professionals, it’s even tougher. If you’re only putting in a few hours of work each week, you’re unlikely to see strong results.

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When you invest, you can select companies yourself, or you can invest into a fund. Investing into a fund means that you and other investors put your money into a pot and let a portfolio manager decide where that pot of money should be invested. Different funds will have different objectives – for example a Global fund, a US fund or a UK fund. Within these objectives, the portfolio manager will decide which companies to buy.

Professional portfolio managers should do better than amateurs – they spend more time analysing companies. But, as with any career, not all the professionals are good at their job.

So, if you decide (wisely) that you’re an amateur and can’t beat the professionals, you may look to invest in a fund. However, it’s tough to know which professionals and which funds to choose.

Those investors who have done well in the past won’t necessarily do well in the future. How can we sort the best from the rest?

The good news is that just as you don’t need to pick companies, you don’t need to find the best portfolio managers to make investment decisions for you. Instead, you can just buy the whole market via index funds and ETFs. Let’s explain.

Index Funds & ETFs

In simple terms, index funds and exchange-traded funds (ETFs) are financial products which give the investor the performance of an index.

An index is simply a group of companies. For example, the FTSE 100 index includes the 100 largest UK-headquartered companies. The S&P 500 index includes the largest 500 US companies. And the MSCI World includes the approximately 1600 largest companies globally.

An investor in an index fund or ETF invests their cash and in return receives the performance of the index, for example the MSCI World. This means your investment follows the performance of the world’s largest 1600 companies.

The advantage of index funds and ETFs is that they buy an entire market, for example the UK (via the FTSE 100) or the US (via the S&P 500). So neither you nor a professional has to choose which companies to own – you just own all the companies in the index, with no active decision-making needed.

This makes things more time efficient. You don’t have to search for the best value-for-money companies – you just buy all of them.

It gives you exposure to a diversified group. You avoid having all your eggs in one basket. Rather than betting on individual companies, you are invested in the aggregate success of all companies over time.

In the long-run, this approach is far better than holding cash in your current account. Why? Because over the years, companies grow – and by investing in them, you are exposed to that growth. The MSCI World index of the largest companies globally has grown by over 9%/year over the last forty years.

Meanwhile, the average growth of savings has been far lower, especially in recent years where current account interest rates have been zero. Investing, therefore, offers meaningful benefits.

By using index funds and ETFs, you:

a) don’t need to choose individual companies; and

b) don’t need to choose anyone to invest your money for you.

In short, they give you most of the benefits of investing, while removing most of the headache.

How to implement

It’s important to understand not only what to invest in, but also how to implement that investment.

To actually invest, you’ll need to use an investment platform. A platform is like a bank for your investments. It will provide you with different accounts like a stocks & shares ISA, a SIPP pension and a general investment account. Within each of these accounts, you can invest, for example by buying index funds or ETFs.

Once you have transferred funds into your investment platform account, you can invest. It’s that straightforward.

Self-directed vs Ready-made

Some investment platforms are self-directed – that means you choose which stocks, funds, index funds or ETFs to invest into. The benefit of these platforms is choice – you can select whatever you want and pick specific index funds and ETFs.

For most of us, however, that extra choice is an unnecessary distraction. We would be better off with a ready-made solution. Ready-made platforms provide an appropriate portfolio based on your risk tolerance. These portfolios are typically made up of index funds and ETFs. All you have to do is specify your risk tolerance and your portfolio is made for you. There are no other choices for you to make.

We will address the topic of risk in future blogs to help clarify this point. But in short, a ready-made investment platform makes the process easier for most people, especially when they are beginning their investment journey.

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It’s all well and good to consider how to get started. But the most important consideration is just to start. Use these guidelines, take a long-term perspective, and you won’t go far wrong.

Once you’ve started, you can build out layers of complexity on your investments. But avoid ‘paralysis by over-analysis’ and get started. In the long-run you won’t look back.

The best time to start investing was yesterday. The second-best time is today.