What New Investors Should Buy In 2016

Predictably enough, weekend newspapers near the New Year were full of investing tips for 2016. Some, I’m sure, were decent enough picks. But I’m equally certain that the vast majority of readers won’t buy a single one of the shares that were suggested.
Which, when you think about it, is a little odd. Like the Sport section, a weekend newspaper’s ‘Money’ section is fairly clearly signposted. And unless readers have an interest in money and investing, they’re unlikely to spend any time perusing the finance pages.

And yet, time and again, I meet people bemoaning the low rates of interest in banks and building societies, and who — particularly in their 40s and 50s — are starting to become concerned over their retirement provision.
Yet they won’t put a penny in the stock market, despite decades of evidence pointing to its long-term outperformance when compared to the returns available from cash.

Pundits for hire

Coincidentally, this week’s edition of The Economist contains a pithy quote from maverick economist J.K. Galbraith, shedding an irreverent light on this conundrum.
Economists, observed Galbraith, don’t forecast because they know, but because they’re asked.
In other words, are the various investment columnists coming up with their picks because they’re convinced that the companies in question can enhance your wealth, or because their editors have told them to produce a list? And to do so, because all the other newspapers are trotting out pundits cheerily sharing their own stock picks?
These are questions that are well worth asking, because the pundits in question very rarely seem to come up with an approach to wealth-building that we at The Motley Fool have seen deliver the goods, time and again over the years.

Taking the plunge

Talk to novice investors, and you’ll often find that it’s not the mechanics of opening a brokerage account that is holding them back.

It’s what to do next — the specific investments to invest in, in other words.
And only very rarely will the answer be to dive straight in and invest based on a weekend newspaper share tip.
Instead, such novice investors are better advised to follow the advice of the legendary Warren Buffett, and start with a low-cost index tracker — a basket of shares aiming to mirror the performance of one of the FTSE’s major indices, such as the FTSE All-Share.

Buy the index

Here’s Buffett himself, speaking in 1996:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
And yet again, in 2007:
“A very low‑cost index is going to beat a majority of the amateur‑managed money or professionally managed money… The gross performance [of a hedge fund] may be reasonably decent, but the fees will eat up a significant percentage of the returns. You’ll pay lots of fees to people who do well, and lots of fees to people who do not do so well.”

In short, instead of aiming to beat the market, investors should simply aim to buy the market.

Wealth-building in action

How effective might such an approach be? Do some calculations, and the gains quickly mount up.
Let’s say that the FTSE All-Share delivers an 8% return each year — a relatively modest performance compared to its long-term track record, and one that in today’s market represents about 50% dividends, and 50% capital gains.
Investing £100 a month for 10 years would yield £18,417. But that’s not really either long term enough, or a serious attempt at wealth-building. £200 for 15 years is a step in the right direction, resulting in £69,669.
Even so, neither the sum invested nor the timescale is appropriate for really serious wealth-building. How about £200 for 25 years? Now you’re talking: £191,473. £350 for 25 years? An impressive £335,078. And for many people, £350 is an affordable monthly investment, albeit one that might involve some occasional belt-tightening.

Adding shares to the mix

Now, somewhere along the way, during those 25 years — perhaps after just a couple of years or so — our investor is going to make a discovery. Namely, that they’re becoming comfortable enough with the workings of the stock market to make some side bets.
Perhaps they’d like to tilt their investments slightly more towards income, for instance. Or perhaps they’re happy to exchange a little bit more risk for a little bit more growth.
At which point, it’s sensible to start looking at individual shares, and gradually adding them to the portfolio.
The bulk of their investments — certainly at first — will still be in their chosen index tracker. But a growing proportion need not be.
Yet that said, when the time comes, there are better sources of investment ideas than newspaper pundits.

Indeed, our top analysts have highlighted five top shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever.