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Sep 10

5 Golden Rules for Beginner Investors

Reading Time: 6 mins

With current savings rates not beating inflation, stocks and shares looks like the only way to grow your wealth. But how do you get started investing without risking everything in one go? Beginner investors – we’re here for you!

These golden rules for investors will help you map a plan to start investing even small amounts every month. Thanks to compound interest and re-invested dividends, you’ll see your money grow over time!

Who Should Become an Investor?

Women beginner investors can make more of their money if they follow these rules

If you hear the word ‘investor’ and think of men in suits like the Wolf of Wall Street, think again. Any adult, from any background, with any amount of spare cash can be an investor!

Women typically aren’t so into investing as men. They tend to put their money into cash ISAs instead of investing. In fact, in 2017/18, 74% of women who had money in an ISA kept it as cash, compared to 64% of men. The gender gap is closing – but very slowly.

Cash ISAs offer a quick-access savings fund and they used to offer fair returns. However, money in a cash savings account right now is losing spending power with every week that passes.

That’s because inflation is around 1.7% – and even the very best savings deals aren’t over 1% (at time of writing). So, every pound in a cash savings account is losing real spending power – what’s worth £1 right now could be worth £0.90 or even £0.80 in spending power next year!

But are stocks a good idea right now?

The Government says there’s been a drop in those investing in stocks and shares this year. In fact, 450,000 fewer people have a stocks and shares ISA compared to 2017/18.

Many people worry about the impact of coronavirus on their returns. Yes, it’s true: there is a risk you’ll lose what you invest. However, the main aim of investing is to ride out the highs and lows because over time the stock market does (historically) outperform savings rates.

Golden Rule 1: Start with an ISA

You could go straight to an investing platform to get started – but that’s not an efficient use of your money!

An ISA is a tax vehicle: you can put up to £20,000 a year into your ISA accounts. It doesn’t all have to go into one account either: spread it across cash, stocks and shares, a Lifetime ISA, and even an Innovative Finance ISA if you fancy!

Any interest and returns on the money in your ISA is tax free. That’s why it’s such a useful investment vehicle: if you go straight to an investment platform outside of an ISA wrapper, you’ll pay tax on your returns.

How a stocks and shares ISA works

You can opt for two types of equities ISA: one that invests on your behalf, or one that lets you pick and choose your fund investments.

For beginner investors, it’s often best to choose a ready-made fund. Then as you learn more about investing, you can opt for a second do-it-yourself stocks ISA or add to your existing ISA funds.

Golden Rule 2: Compare Management Fees

Always research the management fees as well as historical performance of an ISA fund. While historical performance isn’t a guarantee of future performance, it can be a good guideline to compare funds. Those that typically under-perform year-on-year are best avoided!

Check the fees you’ll pay, too. This is where cash ISAs have one advantage over stocks and shares ISAs: you get out the cash you put in. A stocks and shares ISA comes with management fees.

Some are much cheaper than others. That’s because of the type of investing and fund management that happens. Those with mostly ETFs in the fund – passive trackers – are cheaper as there’s less hands-on fund management. Portfolios with a human manager that actively switches funds around to anticipate the highs and lows of the market come with a much higher fee.

Different portfolios come with varying fees even within the same provider. For example, most have an ethical portfolio option. However, as these are still fairly new (and therefore unproven), the fees are higher than a medium-risk portfolio from the same company. Ethical funds are, however, a good idea to invest in – they’re performing well and have a great future ahead as the world becomes climate-focused.

Golden Rule 3: Play the Long Game

Beginner investors need to be prepared to play the long game

When you see the market dip, it’s tempting to say “Sell them all!” to avoid losing more cash. In reality, the FTSE 100 and other stock markets fluctuate on a daily basis. Some weeks, it’ll go down, others it goes up.

Play the long game: aim to invest your money for at least five years (ideally ten or more). This helps ride out any market dips and gives your investment true growth potential.

There is ALWAYS risk with any investment. Look at your pension pot: that’s a form of investing, too! It can grow steadily or rapidly over time, depending on the risk you choose to take. More risk means a greater reward potential.

That’s why it’s important to ONLY start investing with small amounts that you can afford to write off. It’s unlikely you’ll lose everything (especially if you play the long game), but little-and-often investing can protect you against big dips.

Golden Rule 4: Drip-feed Your Cash

Avoid investing one large lump sum. This is because a fund changes in value all the time – so one large lump sum means you could miss out on more shares. More shares means higher returns!

Let’s say you have £1000 and each £1 buys one stock in January. You could invest the whole £1000 for one thousand shares.

But then, in February, each £1 buys two shares. So, instead of having one thousand shares you could have had two thousand for the same investment!

Instead, investing £500 in January (for 500 shares) and £500 in February (1000 shares) leaves you with a total of 1500 shares. Drip-feed investing helps you ride out the ups and downs of the market and maximises the potential of your investment.

Of course, sometimes a stock might dip much lower for some reason – it could be the market overall, or a company announcement that makes an individual stock drop. If the news is temporary bad news, putting more money into the stocks when it’s a lower price could return you far more shares for a small amount of cash. As the price rises again, your wealth grows exponentially.

This is where ‘playing the stock market’ comes in – and it’s usually more experienced investors who choose to take these risks. A fund could drop significantly because it’s about to crash – and then you’d lose all your investment!

Golden Rule 5: Spread Your Investment

Instead of investing in just one company’s stocks, spread your money around. Choose a diverse portfolio with a range of different fund types, too.

For example, MoneyBox offer a medium-risk fund portfolio with a range of international shares, corporate bonds, and property shares. Spreading the risk like this helps balance things out when one side of the market dips. Most pre-selected ISA funds operate in a similar way, to make sure customers stay as happy as possible!

You should also make sure you’re investing elsewhere, too. That could be investing in non-stock alternatives, like art, whiskey, and even Lego! Make sure you’re also investing in your pension, as well as keeping your easy-access cash emergency fund available to you.

Spreading your money around helps protect your savings from an ‘all eggs in one basket’ situation. You need to have several different sources of investment that suit both your medium-future and long-term future financial needs, too!

More tips on investing

Getting stuck into the stock market is a confusing place for every beginner investor. That’s why we’ve put together lots of articles and guides to explain the ins and outs of the FTSE 100! Read these next:

WHAT DO YOU THINK?

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Joanne
Joanne
2 months ago

Great info on investing.

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