One of the best resolutions anyone can possibly make for 2020, in my opinion, is to begin investing if they haven’t done so already.
Despite what some may think, it’s also easy to do. The five steps outlined below should be enough to get you on your way.
1. Know yourself
Admittedly, this isn’t the most exciting step, but nor should it be. Before putting a penny of your money to work in the market, it’s vital to know your reasons for doing so. This can have a huge impact on what, exactly, you choose to invest in.
The only ‘rule’ to abide by when setting goals is that they are sufficiently long term, such as saving for retirement, a child’s university fees or perhaps a house deposit. If you’ll need access to your money in less than, say, five years, you risk getting back less than you put in because market movements — over the short term — are unpredictable.
2. Get an ISA
Opening a Stocks and Shares ISA takes very little time but it’s a brilliant thing to do.
If you make an investment and that investment does well, you’ll pay capital gains tax on the profits you make. With an ISA, however, you can shield 100% of that profit from the taxman (along with any income you receive in the form of dividends).
This really matters. The more money you retain, the greater the effects of compounding over time, greatly increasing your chances of hitting the goals identified in Step 1.
3. Set up a direct debit
Having set up a tax-efficient account, your next job is to load it with cash. With an ISA, your total allowance is £20,000 for the current tax year. Don’t worry if you can’t find anywhere near this amount — simply deposit whatever you can afford.
You don’t need to invest everything in one go either. Indeed, a way of ensuring you’ll stick to investing (and don’t spend everything you earn) is to set up a direct debit with your bank that guarantees a fixed amount of your money is transferred over to your ISA every month.
Investing on a regular basis also means you don’t put all your cash to work just before markets crash.
4. Buy cheap funds
Here at the Fool UK, we like getting down and dirty with individual stocks. This, however, can be rather daunting for someone just starting out. Scrutinising companies also takes time and energy.
That’s why I think new investors should initially concentrate on buying exchange-traded funds. This is a low-cost strategy that guarantees you to get the market return, rather than attempting to beat it. Warren Buffett — generally regarded as the best investor on the planet — thinks the vast majority of people should adopt this approach.
5. Do nothing
The last step is arguably the most difficult of all. In an age of 24/7 news and Twitter rants, it can be easy to assume you should be doing something, anything, just to stay ahead.
Don’t be fooled. Counter-intuitive as it sounds, multiple studies have shown that the more inactive you are as an investor, the better your performance is likely to be. One reason among many for this is that costs are kept low.
Get comfortable doing nothing and you’re on the right road for stock market success.
