How to start investing is simple if you are prepared to do the work. Many jump in too big, too quickly and get burnt. This leads to many quitting which is a shame, as everyone is capable of successfully investing their own money. They can do so if they are prepared to work at it, face up to their own mistakes and apply discipline to the management of their capital. Capital preservation should be your first focus, profits can come later.
What are the first steps you should take
Identify the strategy which works for you
Be prepared to work, study and fail
It is important to identify what you are trying to achieve before considering how to start investing. This will influence how you invest your money and what you buy. Are you investing for the future, ‘working your money’ – which may be needed for a rainy day, or planning for retirement? You could also be trading instead of investing, for the fun of it.
Someone investing for the future will likely focus on growth stocks. As a long-term investor you can stomach the volatility. This strategy will also apply to those who are planning for their retirement.
Those who are seeking to make their rainy day savings work, may want to invest in a balanced portfolio. This will include a large allocation (30-50%) to safer income-focused investments such as bonds and infrastructure funds.
Finally for those who are planning on ‘having some fun’, whilst making some money, the world if your oyster. Hopefully in doing so, you will stay clear of leverage. Loosing the money you placed in your account in the first place is painful, having to drawdown on your cash reserves or sell your car to pay back your broker or bank is particularly painful.
The 21st century fashion for trying to achieve some form of secondary income is admirable. But the constant reference to passive income is utter nonsense. Nothing is achieved in life without work. The idea that you place your money somewhere and that it will mushroom into a large pot is ignorant.
Any source of income is at risk of being reduced, lost, stolen or supplanted. The list is endless. Always keep an eye on changes in the way an investment is being managed. Make sure you understand what it is your are buying. If you do not understand, either research it until you do or walk away.
These have stronger systems and processes in place. They are better able to handle large amounts of trades, which can happen when stock markets crash or suddenly jump up. They will typically charge you per trade.
Flashier is not always better.
You then have the newer glitzier apps who will not charge you to trade. These are focused around such newly fashionable names as Robinhood. They are able to let you trade for free as they make their money from order flow or by charging interest on leverage, which they supply to their clients. Essentially they are hoping to get you to borrow from them. The risk they represent is not yet fully understood, so be wary how much of your assets you place with them.
As you start off, you should always invest with a margin of safety. A sensible and diversified stock portfolio can lead to consistent and less volatile gains. Indeed downside risk is ever present, but can be mitigated using portfolio protection.
Passive investment has grown to be a cornerstone of many portfolios. This can be in a fund which tracks an Index such as the Dow Jones index. Be wary of chasing the hot stocks, these can be appealing as they grow your capital quickly but are often the most volatile stocks.
You should also consider foreign portfolio investment as well as thematic investing. New megatrends can also be attractive, but who knows if some such as Blockchain are really going to become established.
The first thought of many novice retail investors is to make money, i.e. take a risk. This is the wrong approach. Your first thought should be not to loose your money. Start small by only investing 1/3 of what you intend to in the first 6 months.
The chances are, a market wide sell off will occur in that period. This will be a learning curve for you, as well as chance to buy at a discount. To mitigate this volatility risk, only place 5% of your overall portfolio per position. If a stock performs well, trim it and reinvest into something else.
Profit warnings are something you can never get away from. If you have diversified your portfolio, the loss of capital will not be too damaging. You will then be faced with the difficult decision whether to sell or hold on. A third way is to reduce the affected position, remember the first cut (reduction) in a position is the cheapest!
When you start investing you will be assailed by people offering you all sorts of strategies and ideas. Many (most) of these will not work for you. You will have to work out what it is you trying to achieve, before you can pick and choose. This will take time.
You will likely change your strategy more than once as you start with a pre-set idea, only to find out it does not work or you cannot handle the volatility. If you can start small, do the work and be patient, in 2/3 years you will overcome novice mistakes to become a proficient & successful investor!