Alan Oscroft gives some tips on how not to lose money in the stock market.
I was talking to my old mum the other day about some money that I have to invest, and she asked me what I was going to do with it. I told her I'd buy some shares with it, and I got a horrified look in response. "But you might lose it all!" she exclaimed. Leaving aside the possibility that she might be right -- I seem to be fatally attracted to dodgy small companies -- isn't that the biggest fear faced by investing beginners?
It's often said that the best approach to making money is to start off by ensuring that you don't lose it, so how might I lose all my money? Well, I could lose it if I invest it all in a single company and that company goes bust, or if I invest it in the latest fashionable bandwagon just before the bubble bursts (as so many unfortunate beginners did in the technology boom and bust of just a few years ago).
But suppose I spread my money across a number of big companies in different sectors? Or I invest it all in, say, a FTSE All Share index tracker -- a fund that spreads my money across all of the companies listed on the main UK stock market? To lose anything significant either a substantial number of large companies would have to collapse, or the whole market would have to crash very hard (which would inevitably be linked to severe economic hardship). And if either of those happens, how safe would my money be if left in the bank anyway (considering that the banks are mostly listed companies that could well be going bust themselves)?
The truth is that the UK's biggest and best companies are not going to go bust en masse any time soon, so if I spread my money across a number of them (by buying different shares myself or buying a tracker), I'm not going to lose it all.
But I could still lose a chunk if I invest all my money at the top of the market and we then have a few years of a falling (or "bear") market, so how could I cope with that?
There are two strategies. Firstly, if I drip my money into the market a bit every month (which you can easily do with a tracker - they'll usually let you invest as little as around £20 a month) rather than investing it all on one day, I'll spread the risk of hitting a high point. I'd also have the bonus of continuing to buy shares more and more cheaply while they're down. Secondly, and most importantly, I'll invest my money for the long term (meaning I intend to leave it invested for at least 10 years). Over such periods, market falls tend to fade into insignificance compared to the long term rise in the value of shares.
To summarise, here's a few tips on how not to lose money...
- Don't put it all in one company, especially not a small one.
- Spread it across large companies by using a tracker.
- Diversify by buying companies in different sectors.
- Keep off bandwagons - when "the blokes down the pub" are all talking about the latest investment craze, that's when it's time to look elsewhere.
- Drip your money in, regularly, over a longer period.
- Only invest for the long term.
So what am I going to do with my bit of money? I'll probably put it all on a high-risk small company (but I won't tell my mum).
