A breakdown of the referendum result revealed that a majority of young voters wanted Britain to remain in the EU. While many were no doubt disappointed by last Friday’s result, I believe that there has rarely been a better time since the height of the credit crunch in 2008 for this group of people to begin investing.
Seize the opportunity
Young people have one thing that money can’t buy — time. As such, their investing horizons could (and arguably should) stretch for many decades into the future. The beauty of beginning to invest as early as possible is that it allows you the time to ride out the inevitable periods of economic upheaval that occur every so often, such as the one we’re likely to experience over the next few years. Generally speaking, older investors require more security and so prefer the relative safety (but lower returns) offered by bonds.
Recommending that people should be “greedy when others are fearful” might not sit well, especially as UK politicians are appealing for communities to come together. However, it’s usually the case that the best time to invest is when people are avoiding stock markets or waiting for share prices to go back up. The latter may happen soon, or markets may fall again, depending on whether the UK enters recession later this year. Ultimately, no one knows. Rather than holding back, I suggest those with may years ahead should just get started on their investing journey.
Track down a tracker
New investors could do a lot worse than invest in a cheap FTSE 100 index tracker. This is simply a way of purchasing little bits of the 100 largest companies listed on the London Stock Exchange, including GlaxoSmithKline, Royal Dutch Shell, and Vodafone.
Index trackers have great appeal. In addition to being a low cost way of investing, spreading your capital across the market means that you aren’t too exposed to any one sector. Should shares in banks continue to slide, it won’t matter too much, because your money will also be invested in defensive tobacco stocks, utility companies and consumer product businesses — stocks that people tend to seek out less volatile stocks during economic crises.
Another reason to invest in the FTSE 100 is because the vast majority of its constituents have a global presence, meaning that their earnings aren’t dependent on just one continent such as Europe.
A further benefit relates to timing. Most young people can’t afford big losses. That’s why regularly investing modest amounts of cash regularly, every month, in both good and bad times allows a person to profit from pound cost averaging — the ability to buy more shares when prices are falling and fewer shares as prices rise (assuming the amount invested doesn’t change). In the long term, this protects an investor from stock market volatility and is far less risky than investing everything in one go.
Of course, those people who think they may be able to beat the returns from an index may want to buy shares in individual companies — perhaps even those companies that have suffered the most over the last few days. While this can be a very profitable strategy in the long term, this kind of investing also exposes you to additional company-specific risk, even when the consequences of Brexit are factored in. So I’d suggest novice investors should tread carefully.
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Paul Summers owns shares in GlaxoSmithKline and Royal Dutch Shell. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.