Investing for beginners – a quick guide

In this blog post on investing for beginners I’m going to explain how I would approach the markets as someone who just wants to get going with the least hassle possible, wants the lowest fees and wants the simplest way of investing. If tools like Moneybox or Nutmeg attract you, but their fees do not, this is for you! As always, everything in this blog is how I would go about things and is not financial advice.

Why as a beginner you should invest

Investing is now more accessable than ever. Banks are offering interest rates of between 0.3% and 1%, their proposition is not very attractive, so the markets seem far more interesting. Apps like Trading212 and Freetrade make it incredibly easy for anyone to get started with the stock markets; but before we do that we should get a few things straight.

When you get paid, you should always pay yourself first as well as pay off all your bills and debts. Keep a rainy day fund and add to it – a savings account which can help you back on your feet if anything goes wrong. Only then should you invest what you can afford to lose. If you can’t afford to part with that money for good, then investing is not for you and is too risky.

If you are in a position where you can do all of the above, then congratulations, you’re in a position to make your money work for you!

First things first, before we start this investing for beginners guide, you should know that in this game you can both gain as well as lose money. Markets fluctuate and some days you’ll be in the green (good!) and other days you’ll be in the negative (red – not so good..). That’s why you need a plan and to remove emotion from your investments. Waking up after a crash and seeing yourself down £2,000 isn’t fun. But like I said earlier, this is money you can afford to lose. So it shouldn’t matter anyway as you don’t need it immediately.

Imagine needing your money as a market has just crashed, and being forced to sell at a loss! That’s why we only invest after we have saved, and paid off all our debts. This allows us to weather the storm.

The upside is that if you pick a winning company, you could see sky high returns and have passive income. More than likely though you’ll end up with an 7 – 8% (hopefully more!) return and see something like the following:

On an initial $5,000 investment with a $200 monthly contribution for 10 years with an interest rate of 8%, you could see a profit of $16,500. As with all things compound interest, the more you start with, the more you contribute and the earlier you start, the better. So let’s get started!

Which platform should I use?

This is really up to you. For small amounts, I see nothing wrong with trading apps. Apps such as Freetrade and Trading212 are protected by the UKs Financial Services Compensation Scheme (FSCS) up to £85,000. For our American friends, that’s likely Robinhood for which is protected by SIPC up to $500,000. For anything more than the covered amount, I would then likely consider using a larger broker which has been around for some time and which is unlikely to go under or be bought out as a startup. Fidelity is great for Index Funds and ETFs and I’ve heard good things about Hargreaves Lansdown.

What is an ETF?

An ETF is an Exchange Traded Fund. It’s a type of security (a tradable financial asset or instrument) which can track indsutries, geographies and much more. Much like shares, its value can go up as well as down dependent on the assets it holds and how they perform.

Think of an ETF like a bag which contains many things (stocks). If I buy an ETF, like US Tech Stocks, then that bag will hold many different US tech stocks within in (Microsoft, Tesla, Oracle, Google, Facebook, etc…). If they perform well, then so does my ETF. Similarily if they have a bad month, then it could go down too.

What’s great for people starting out in investing is that you’re investing in a sector or a geography. There’s no individual stock picking, and you’ll be exposed to many great companies. You could for example choose an S&P 500 ETF which tracks the top 500 US companies. Or maybe you want to invest in Emerging Markets due to their growth potential (countries like China, Brazil, South Korea).

There are many great ETFs to choose from (see: fidelity top picks), all of which will perform differently. But be careful not to put all your money in one basket! If you invested heavily in oil and suddenly a trade war started, the price of the entire indsutry could crash. If America wanted to start a tech war with China, then tech stocks could be heavily impacted. So the key here is to diversify!

I almost forgot! When you buy stocks, you’re subject to stamp duty. But ETFs are exempt from stamp duty. Another great reason to go with ETFs.

So, investing for beginners… which ETFs would I pick?

Again, I’ll warn you that this is not financial advice, nor a recommendation.

As a beginner I would try keep it simple. I would want to invest a small sum every month after pay day, and try keep the value of the four balanced at the end of the month. If one ETF shoots ahead this month, then the following month I’ll top up the ones which are under performing. Topping up a winner might get you short term wins, but it could also drop down to a more reasonable price making you lose out.

I would likely aim for something along the lines of:

  • A tech stocks ETF (For rapid growth – maybe start slow here given recent highs)
  • MSCI World (For stable growth)
  • Gold (To hedge against markets crashing)
  • Some other ETF to balance out over-exposure to America.

In summary: As I mentioned earlier, keep to it. This investing for beginners guide is by no means comprehensive, and some months will work great, others not so much. Invest after you have paid off your debts and saved money for rainy days. Investing is for the long term, and always do your own research!

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