For almost anything in life, taking the first step is the hardest. No matter how prepared you think you are, taking the first step at anything new, is always the hardest thing to do. Whether you’re learning a new language or starting a new job, the initial hurdle is half of the battle. When it comes to investing, it is no different. Whether you want to invest £500 or £5000. If you have never done it before, it can be overwhelming and intimidating to figure out how to start.
Here are a few tips on how to start investing with little or no experience.
The first step is to do away with a few preconceived ideas. You do not need to have thousands of pounds or dollars or whatever currency you own to start investing. You also do not need to have an intricate understanding of the stock market nor do you need to be a trader on the stock exchange floor. None of these are a prerequisite to start investing. The reality though, is the earlier you start investing, the better. As an investor, you may need to seek advice from a financial advisor and be comfortable accepting the risk that as with all investment, your capital is at risk.
When it comes to options, there are a range of investment products out there, but the most common and easy to access are stocks and bonds.
Here is the lowdown on both:
1. Stocks
Stocks (also referred to as ‘shares’) represent the partial ownership of a company. When you buy stocks, you are buying a slice of a company; the size of the slice, is dependent on how much stock you buy. When it comes to investing in stocks, diversification is really important, because stocks can be volatile; so in order to protect your investment, it is best to invest across several industries to manage your risk.
2. Bonds
Bonds are a loan from you to the government or a company. In other words, they are in debt to you when you buy a bond, and they will pay you back with a fixed percentage of interest after a set period of time. This is why they are known as ‘fixed income instruments’. A government bond is a debt security issued by a government to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them. Bonds will usually include a bond rating — which is credit scoring schemed used to judge the quality and creditworthiness of a bond. The higher a bond’s rating, the lower the interest rate it will carry, all else equal. Although the less risky of the two, they are not completely risk-free, as in the case where a company goes bust during a bond period, interest payments will cease and you may not get back your initial investment.That being said, bonds are mostly predictable.
To invest in stock and bonds, you have a few options: by buying individually from a company, government or through a fund. With individual shares, you pick the companies you would like to invest in and may get a regular share of its profits (known as ‘dividends’). Funds involve investing in bonds or shares in a collection of companies. Some funds also invest in other assets like property and alternative investments. By investing in a fund, you effectively diversify your portfolio and reduce your risk, in the event that one of the companies within the fund should perform better than another. There are different types of funds, the two most common of which are :
● Actively managed funds — are usually managed by an expert fund manager or a team of fund managers who decide what to invest in and how many shares to buy and sell.
● Tracker funds — also known as ‘passive funds’, track a specific index like the S&P 500, the stocks in an index are fixed, not manually picked, and replicate the performance of a stock market index. Exchange traded funds (ETFs) are a type of tracker fund which are listed on a stock exchange, so you can buy or sell them any time the market is open.
It’s tempting to try to time the market, but it’s almost impossible and even the most experienced investors get it wrong. By pulling out of the market as soon as a fund dips or trying to second-guess when a fund will reach its peak, you could lose out on sharp recoveries or see the price go down again.
Instead, you should invest on a regular basis — in investment lingo this is called ‘dollar-cost averaging’. This allows you to smoothen out any ups and downs, and spread your risk across several entries.
While stocks and bonds are both investment options, they are quite different. With stocks, you buy equity in a business and own a part of it, while with bonds, you are essentially lending money (to a company or a government) to be paid back with interest at a later date.
When it comes to deciding between stocks and bonds, it all boils down to risk. If you are comfortable with taking high risk which has the potential to yield higher returns, then stocks are a great option. If you want a safer, predictable investment option, then bonds may be a good option. That being said, most people have a portfolio that includes a combination of both. The proportion of stocks and bonds in your portfolio depends on how much you are willing to invest and how big of a risk you are willing to take. It’s worth noting that even when investing in bonds, there are no risk-free investments and your capital is at risk.
Funds available on Wealth8 will always contain a balanced mix of stocks and bonds. The mix of products will be dependent on the risk profile of the fund. There is no guarantee that the Fund will perform as expected and remain within a certain risk volatility profile.
When investing, the value of your investment may rise or fall and there are no guarantees you will get back all the capital you have invested.
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