I’m going to be very basic with this and hit the main points. After all, with most things if you follow KISS (Keep it simple, stupid) they tend to work out better than over complicating the task at hand.
Disclaimer: none of this is to be taken as investment advice. Investing carries a degree of risk. Make sure that you understand those risks before you begin.
Some Required Reading
Market Wizards – Jack Schwager
Fooled by Randomness – Nassim Taleb
Reminiscences of a Stock Operator – Edwin Lefevre
Buy the Rumour, Sell the Fact – Michael Maiello
A Random Walk Down Wall Street – Burton Malkiel
The Intelligent Investor – Benjamin Graham
These are a few great books on investing/trading and I’m so kind that I’ve found them and given you them for free. You can find hundreds more here.
- Investing is important for wealth accumulation. Investing is essentially looking to seek value. Value is defined as being an asset that is currently at a discount (i.e it will grow in the future).
- You trade via a broker. A broker is an intermediary between you and the market. They are essentially matching your demand for an investment with the market supply of investments. My preferred broker can be found by clicking here. You want to open a stocks and shares ISA to take advantage of tax benefits. I am not a tax specialist so I will not speak about tax, however there is a guide here for you to look at that covers everything about investing in funds.
- Compound interest is a wonder of the world. Compound interest is where the interest (in investing’s case, yield) increases the relative yield year on year. Imagine you have £10,000 on an asset yielding 10% per year. End of year 1, you will have £11,000. End of year 2, you will have £12,100. End of year 3, £13,310 etc.
- Investing in index tracking exchange traded funds can be the most lucrative over the long term. Over the last 6 years, Vanguard’s SP500 tracked ETF ($VOO – an ETF is a group of assets amalgamated into one – in this case, all stocks in the SP500, a US stock market) has increased in value by 150%. That means that if you put £10,000 into this fund in 2010, you would have around £25k now (£15k return). There has never been a 20 year period in the history of the SP500 where you can have lost money. Think about that for a second.
- Understand bonds and their relevance. Bonds are a key part of a portfoilo since they generally carry little risk (unless you delve into corporate bonds). Vanguard’s Total Bond Market Fund has achieved 50% growth over the last 10 years annualised. This fund has quite a heavy weighting toward US Treasury Bonds and these are pretty low risk, since the US government is highly unlikely to default on its debt (next week they’ll probably collapse now I’ve said that).
- Diversification is highly important for long term consistent growth. Diversification means that you reduce the effect of external economic variables on the price of the assets that you hold. If stocks are falling, it’s likely that bonds will increase in price, since investors consider them safer. Conversely, if stocks are rising, bonds are likely to fall (but not that much as they are a required lending mechanism for governments and institutions). You’re always looking to minimise your downside while maximising your upside (profit).
- Once you have a good base, you can look to increase your ‘alpha’. Alpha is the extra returns you might make on your portfolio compared to simply keeping your money in a benchmark index (like the SP500, FTSE etc). One can do this by looking to buy individual stocks or invest in specific commodities – basically anywhere you feel currently has value.
- It is a marathon, not a sprint. You don’t want to be in and out of the market. You also don’t want to be spooked when you feel the market is going against you. Remember, no one has lost money investing in the SP500 in any 20 year period.
- When it comes to the time where you do want to invest in single stocks, however, you might want to be in and out of the market. These can be more volatile in the short term as they are prone to market shocks a lot more than a stock market filled with hundreds of different companies in different sectors. Therefore, sometimes it is necessary to possibly only be in the market on single stocks for a few weeks or months and take your profits accordingly.
- But how do I know what to buy? There are a variety of ways to analyse the direction of assets. Since we are looking here at longer term investing and not trading, we’ll assume we are only looking to buy. There are quantitative, fundamental based and chart based elements to analysing an asset. You have to pick which you are more suited to. Quantitative analysis is looking at balance sheets, revenue, spreadsheets, fundamentals is looking more at where the value is based on product, staff, mergers and acquisitions (which has a lot of crossover with quantitative analysis) and technical analysis is looking at funny lines all over your computer screen. All can work, you just find which is suited to you.
- Learn to use Excel and combine this with Google Finance. Both will help heavily in tracking and managing what you own. It will also allow you to have a deeper understanding of what’s going on in the economy that can affect what you are holding.
- Speaking of understanding, read about the markets and economy. Even if it i just a few articles per day on Bloomberg’s front page, try and grasp the pace and mood of the markets and why that mood is there. Helps a lot (even if you want to sound smart during small talk). Some good sites are Seeking Alpha, Reuters Business, FT Live, ForexLive and my Twitter.
- Emerging market ETFs can also be a good investment – but beware. Emerging markets carry bigger risks, whether they are geopolitical, economic, political, whatever. This means that although they can have a lot of upside, they can equally have a lot of downside, and both can occur at a very fast pace. Carry these as part of a well diversified base portfolio using a smaller amount of cash than you would with a US or UK fund (these still carry risk too though, obviously). A good ETF to look at via Hargreaves Lansdowne is iShares Core MSCI Emerging Markets ETF.
- How much do I need to start investing? Ideally £1000 minimum. Most ETFs cost around $200 to open so if you want an initially well diversified portfolio of 5/6 ETFs to choose from, £1000 is a good minimum to start with. However, this is at your own discretion. Get an account opened now. You’ll probably only end up spending that few hundred quid on a night out where the only outcome will be a hangover and tiredness for 2 days anyway.
I hold all three of what we have mentioned above. Quick run through: Vanguard Index Funds S&P 500 ETF Shares (VOO), Vanguard Bd Index Fund Inc Total Bond Market (BND), and iShares plc MSCI Emerging Markets Consumer Growth (IEMG)
I wasn’t lying about not being able to lose money on the SP500 in any 20 year period by the way…