five steps if you’re a first-time investor

Linda J. Dodson

Investing in the stock market for the very first time can seem a daunting task. But low interest rates has meant returns from cash savings has diminished forcing many people to consider shares if they to grow their money.

Stock market returns can be volatile, but over the long term they have trumped the dismal savings rates on off in Britain. Last year, the FTSE 100 index of Britain’s biggest companies returned around 10pc and the American stock market returned close to 30pc. Although, this year both have nosedived because of the coronavirus-induced economic shutdown.

However, since 1800 the British stock market has made a made a return – after accounting for inflation – of 6pc a year, according to investment manager Vanguard Group. This is far better than holding your money in a savings account. 

Setting up a savings account is relatively straightforward and involves no risk to your cash, other than inflation. By contrast, investing in the stock market – with hundreds of companies and a plethora of funds to choose from – can seem an altogether different challenge, even once you have decided to stomach the risks.

Like many problems, it is more readily tackled if you break it down into component parts. Here is our five-step guide.

How to buy stocks and shares

What are my goals?

The initial thing any first-time investor should do is decide on their goals, which in turn will determine how long their investments can be left to grow.

If your goal is a short-term one, such as saving for the deposit on a house that you hope to buy in the next few years, the risks of the stock market mean that a cash savings account will be a better home for your savings.

Any money earmarked for retirement, on the other hand, will be well placed to benefit from the long term potential of stocks and shares. Alistair Cunningham, of Wingate Financial Planning, said: “Pension money may not be touched for decades, and studies show that exposure to stocks and shares is likely to give the best return.”

Where do I start?

In order to start investing in the stock market you’ll normally need an account such as a stocks and shares Isa or a pension. Most high-street banks offer the former, which will connect easily with your current account, but these options are unlikely to offer a particularly flexible choice of investments.

There are a wide range of specialist fund shops that allow you to open up an Isa or a pension. The best one to choose depends on your personal circumstances, such as the size of your savings pot, where you plan on investing and how much you know about investing. 

For truly flexible choice on where your money is invested, the best option will be a “fund shop” or investment “platform”, which will allow you to put money into shares and funds easily.

Choosing the best fund shop will be based on several factors, including cost, and the cheapest option will depend on how much you have to invest.

For those with smaller pots and are looking for high-quality information about what investments to choose, Barclays Smart Investor, AJ Bell Youinvest  and Fidelity Personal Investing are the market leaders. They charge a percentage fee on the size of your savings of 0.2pc, 0.25pc and 0.35pc respectively and have low trading charges. 

Barlcays has a minimum annual fee of £48. This means that you have to have a pot of nearly £20,000 for this to be cheaper than AJ Bell, which has no set annual fee. 

Investors can go cheaper still by selecting iWeb, which has no account fee at all. However, the website can be difficult to navigate and you will be on your own when picking  your investments. 

If you have over £50,000 in savings, you will be better off with a fund shop that charges a fixed fee every year, rather than a percentage fee. Interactive Investor is the most user-friendly fund shop and charges a competitive £120 a year. Its website is packed with investment information and guidance.

Stocks or funds?

Once you have set up an account, you will be able to choose whether to invest directly in companies by buying their shares or indirectly in a number of businesses via a fund.

If you invest directly in shares, your Isa or pension platform will charge for each trade and there could be stamp duty to pay, but you will avoid the fees that come with owning a fund.

However, investing this way is complicated and requires extensive research and you would need to ensure proper diversification by investing in a wide range of companies.

Funds offer a ready-made collection of stocks put together by a fund manager. This gives you some instant diversification, although some funds specialise in a particular sector.

Certain funds dispense with a human manager and simply buy every share in an index, such as the FTSE 100. Such funds, called “index trackers” or “passive” funds, are much cheaper to run and their popularity reflects the fact that even expert fund managers find it hard to outperform the wider stock market consistently.

For complete beginners looking for broad exposure to stocks, passive investing is a great place to start as you automatically buy every stock in a market place at a low cost.

Online investing services such as Nutmeg or Wealthify win points for ease of use. The investment choice is deliberately limited and it usually consists of a selection of high, low and medium-risk portfolios. Vanguard is the leader in low-cost investing and their website will guide you to portfolios in its “Lifestrategy” range of investment funds that are tailored to your investment time horizon. 

How do I select shares or funds?

Anyone who chooses to invest directly in shares will, as mentioned already, need to carry out plenty of research. The Telegraph’s Questor column is a good place to start, while fund shops typically offer plenty of data to help you make your selections.

If you choose to go down the fund route, a cheap tracker may make sense as the first component of your portfolio. A popular choice is Vanguard LifeStrategy, which features in the “Telegraph 25” list of our favourite funds. Also featured in our list is the iShares UK Equity Index fund, which is one of the cheapest ways to track the broadly based FTSE All Share index; its annual charge is just 0.06pc (remember that your fund shop will also charge, however).

Many young investors choose to use one of the above funds as the core of their portfolio and then invest small amounts in more adventurous funds that align with their interests. There are funds that invest in everything from robotics and artificial intelligence to emerging markets.

Brian Dennehy of Fund Expert, an investment platform, said that when he was starting portfolios for his godchildren he focused on emerging markets as an area that should provide good returns over 20 years.

He said: “Emerging markets are now more stable and they remain cheap relative to other markets. The world economy has moved through a stage of reliance on China and India is next.”

What are first-time investors’ most common mistakes?

According to Fund Expert, the biggest mistake among first-time investors is tinkering with their portfolio too often.

Investing in the stock market is a long-term project and the best returns will be made by choosing a strategy and sticking to it, even if there are bumps along the way.

Mr Cunningham agreed, saying: “Set things up and leave them alone. This might sound counterintuitive, and I do encourage structured reviews, but there’s likely to be more potential for harm by tinkering too frequently.

“When a portfolio falls, as it inevitably will from time to time, the best advice is often to hang tight.”

We put together a list of investment tips here, which includes advice like “diversify your investments” and “think global for the best returns.”

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