How to Invest:
Download: How to Invest
Download: How to Invest
With the recent surge of news around the economic impact of Covid-19, you may have started wondering if now was a good time to start investing in the stock market. You’d also be forgiven for worrying that it might be a bad move. In fact, we’ve had a lot of questions around this area: What should I invest in? How much should I invest? Will it go down further? You might even be wondering how to invest in the first place!
There are no guarantees when it comes to the stock markets, and your money can indeed go down as well as up in value. So, in all honesty, we can’t tell you whether it’s going to rise or fall from one day to the next. What we can tell you though, is what history has told us about the nature of investing, and how that information might be used to your financial advantage. So, if you’re new to the concept of investing then this blog will be perfect for you. If you’re already invested but need a recap of the core principles, then this will also serve as an excellent reminder to steady your nerve! Let’s begin.
Starting at the Very Beginning
When it comes to investing, ‘how’ to invest isn’t actually the first thing you need to know. The first question needs to be ‘why’ do I want to invest.
If you are speculating that the price of a share will increase and you want to make a quick buck then that is fine. But, you have to realise that you are doing exactly that – ‘speculating!’ You could quite easily lose the money and that’s the risk you take.
If you are investing for something particular, your retirement or your kids education for example, then this enables you to focus on a goal. A plan can then easily be formulated. Once you have found your ‘why,’ then you can start talking about the ‘how.’
It’s All About Time
The next thing you need to know about ‘how to invest’ is that it’s about looking at what you are trying to achieve. Following closely on from that is when you want to achieve it by.
We say this because being invested over the long term (for retirement say), allows you to weather dips in the stock market and come out the other side. You can then take on some risk in order to get a decent return and achieve that all important goal. You need to be aware that market recoveries take time. So, you’ll need to keep your head and stick to the plan.
In contrast, if you need to save for something that is just around the corner (lets go with a holiday), then you don’t have the capacity to take on a lot of risk. A market fall could see you on a ‘staycation’ rather than that trip to the Maldives!
What we are trying to say is that Markets fluctuate. This is just something you will have to come to terms with if you do decide to invest. That’s why, as financial advisers, we’re always so preoccupied with our client’s goals, time frames and ‘attitude to risk’ or ‘risk appetite’ as we like to call it.
At the moment, the news is abuzz with each and every wobble in the stock market. During such times of uncertainty, people often lose their nerve and start thinking about cutting their losses before things get any worse. Historically though, we have seen that markets recover. Furthermore, there is often a spike when the recovery comes. So those who have thrown in the towel often miss out on the rewards to be gained by holding fast.
What Can I Invest In?
When it comes to what you can invest in, it’s not just shares, there are many options and some of the common ones are:
For most, investing means putting money in the stock market but it really does depend on what you are trying to achieve and how much risk you are willing to take. Often advisers will talk about ‘Asset Allocation’ which is simply the mix of assets being recommended. A well diversified approach then, will have an allocation to various assets. Even within each asset class there will also be a good spread to lower your risk.
How do stock markets work?
In short, a stock market is simply a place where buyers and sellers meet to sell shares. Each share is a tiny part of a company.
When you invest in shares, you’re basically backing a company. In return, you get to benefit from its success. Then, if you want, you can trade your shares with someone else who wants to buy them. Obviously, the hope is that your share will have increased in value during the time it is in your possession so that you can sell it on for a handsome price. You may also get to enjoy any profits from the business in the form of a dividend paid to its shareholders.
In fact, its the compounding effect of these dividends that really can drive long term returns.
Why does a company share price rise and fall?
The price on any given day can fluctuate depending on many different factors. During the current pandemic situation, you will undoubtedly have seen how poor financial results, the overall economic health, and ‘sentiment’, have all impacted the stock markets. These are all factors, with ‘sentiment’ (i.e. if buyers decide a firm will struggle on the back of a situation) being particularly damaging. In basic terms, it’s supply and demand.
Literally… ‘How to Invest’
So, now we’re onto the mechanics! You’ve decided ‘why’ you want to invest, ‘when’ you want to achieve this by and what your attitude to risk is, and you’re adamant that investing is for you. So, now you quite literally want to know ‘how to invest.’
You can buy shares (or funds, which are instruments that enable you to buy lots of stocks at once) from many different providers. A very popular way to do this is through a ‘platform’ (which is accessed through the web), or you can speak to a reputable financial adviser who can provide advice and then implement for you. The added advantage of an adviser is that they have access to many tools which help them recommend the right portfolio for you personally. They also know the tricks of the trade to maximise your tax allowances and can build a visual image of how the plan may turn out over time. (That’s the advertising spiel done, we promise!)
Investing on a platform is a two-stage process, first you pick a platform so you have the tool to make the trades, then you choose which investments to buy (which will then sit on the platform).
You should be aware that generally you will be charged for using the platform and then for buying the investment. Some of the platforms may be more expensive to use but have cheaper investments and vice versa. They will also have different functionality, so, you will need to weigh up what is best for you. The actual buying bit of investing is that simple. The complicated bit is making sure the investments you buy are the right fit for what you are trying to achieve. That’s why we always say, if you are at all unsure, or would simply like a second opinion, it’s always worth seeking professional advice.
What Else Should I Know About How to Invest
Here are some key take-aways for you to remember!
The greater the potential return, the more risk you’ll have to accept.
If you do not have a great appetite for risk, it will be worth taking less risk but you may not see the level of return you desire.
Diversify, diversify, diversify.
You will hear advisers talking about ‘diversification’ all of the time. It just means not putting all of your eggs in one basket. Diversifying your investments lowers your exposure to risk. If one of your investments doesn’t do well. The hope is that it will be offset by those that have performed better.
Investing is a long-term game.
The longer you can invest for, the greater chance you give your investments to work. If you will need access to the cash in the shorter term, it is probably best to put it in a savings account.
Keep on top of your investments!
Don’t just invest and forget. It is so important that you review your investments regularly. A fund might not be performing as well as you hoped. Your circumstances or attitude to risk may have changed. Your investment portfolio needs to adapt with you so that it continues to meet your needs.
Remember that investments fluctuate.
It is in their nature to go up and down. So, don’t panic sell or be easily led by the crowd to buy something that you don’t understand. Investing is about you. Your situation. Your finances – and your goals. Make sure you do what is right for you – and, if you’re not sure, remember we’re here! It’s always fine to get some help when you need it.
Remember, investing needs care and attention. It also needs monitoring and careful reviews if you are to achieve your goals. If you would like to speak to an adviser to see how we can help, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch.
Written by Ben Griffiths
Ben is a financial planner from our Whiteley office. While he specialises in pension planning, Ben is also able to generalise into all other areas of financial planning.