The idea of investing in the stock market is an attractive one for a lot of people. Yet many of them never start buying shares.
If I wanted to begin investing for the first time, here are five principles I would follow.
1. Invest affordably
Investing takes money. Whether or not someone has spare money to invest – and how much – depends on their personal financial circumstances at any given moment.
I think it can be helpful to try and establish a target of how much one wants to invest each month.
Crucially, though, I would always invest within my means.
2. Take a long-term approach
Companies like Unilever, BP, and Lloyds Bank have been around for decades.
That is no guarantee that they will still be around decades from now. But, as a long-term investor, I am hunting for companies I think have a long life ahead of them. So I tend to look for established, profitable businesses that I reckon are well-placed to benefit from future customer demand.
I would not start buying shares hoping they shoot up in price suddenly. Instead, I would seek to identify great businesses I hoped could produce growing profits over time. Hopefully that could see their share price grow over the years.
3. Never knowingly overpay
Simply buying into a good business does not mean an investment will do well, however.
One common mistake people make when they start buying shares is focusing on the business without paying attention to share valuation. But paying too much even for a brilliant business can be a costly mistake. Profits may go up, but the share price could still fall.
So, whenever buying a share, I always aim to make sure I do not overpay for it.
4. Build a diversified portfolio
Another common mistake people make when they start buying shares is concentrating their portfolio on what they think is the most compelling investment idea.
It is easy to understand why they do that. But unfortunately, even the best company can stumble. That can be due to something completely outside its control.
Diversification is a simple but powerful risk management principle that basically means not putting all your eggs in one basket. I would diversify my portfolio from my first day of investing.
5. Focus on risk as well as reward
Diversification is one risk management principle – but there are others.
It is easy to start buying shares focused on how well they could do. But I think it makes sense to pay a lot of attention to possible risks too.
If I invest in shares and a risk comes to pass, driving their price down, I could make a loss. That will give me less to invest in future.
Rather than just looking for shares I think could reward me handsomely, I also actively try to avoid any that do not match my risk tolerance.
