FOOL SCHOOL
Should You Be Buying Shares?

January 28, 2002

Buying shares in individual companies is not for everyone. Here are the five reasons why you shouldn't buy shares.

• You have debts (apart from your mortgage)
• You need your savings for a specific purpose
• You are not prepared to invest for more than 5 years
• You haven't done your homework first
• You can't get to sleep because you are worrying about your investments

Debt

Debt is a virulent disease. It spreads. Some credit cards charge you interest of 20% a year. The chances that you will do better than this as a novice investor are between slim and none. To put it in perspective: Warren Buffett, arguably the world's greatest investor, has managed an average 23% a year. So pay off your debt first. However, there is no reason why you should not learn about investing in shares before you get out of debt. The extra practice could come in very handy.

Some people believe you should also pay off your mortgage debt before investing. That's why it is in brackets above. Whether you'll want to do that is largely down to personal preference and your attitude to risk. That's beyond the scope of this series but this article highlights the two sides of this argument if you want to know more.

Your savings and your timeframe

By investing in shares you are putting your money at risk. The long-term rate of return from the stock market has been significantly greater than cash saved in a bank or building society. But it is more volatile. So if you invest for a short time your performance is much more down to luck. Investing works best when it is done over decades, such as saving for your retirement. That's why we say that if you are not prepared to invest for at least five years, you shouldn't invest at all.

If you need your money for a specific purpose like a deposit on a house or a tax bill then you definitely should not be investing in shares at all. We often get asked on our discussion boards about the best way to invest for a certain period of months. The only sensible answer is to stick your money is in a high interest savings account. The risk of doing anything else is just not worth it.

It is often said you should only invest money you can afford to lose. A more constructive way to consider it is: "if I lost this money, would it affect my day-to-day life or expenditure?". You also need some money for the proverbial rainy day. A sensible rule of thumb is to set aside enough for six months' expenditure in a high interest savings account. But you may feel happier with more if, for example, you have a number of dependants.

Do your homework

There's no need to rush with investing. As with anything in life, you need to do some learning first, then practice before tackling the real thing. Start slowly, learning from your mistakes and from others. To be frank it will probably take up to three years before you can put your hand on your heart and say you are truly comfortable with what you are doing. But it's worth it. In fact most of us feel that we never stop learning about investing.

The Sleep Test

Everyone has a different attitude to risk and their money. If you wake up in the middle of the night shrieking "SELL! SELL! SELL!" then it's a fairly safe bet that investing in shares is not for you. That's just fine. Think about buying out an index tracker instead.

Where Next?
Broker Centre
Get A Tracker