If I were coming to the stock market with my first £10k to invest I’d choose my stocks and share-based investments carefully.
Perhaps the biggest possible ‘sin’ in your career as an investor is to lose money. That may sound a silly thing to say, but losing your capital irretrievably is more expensive than you might think. When you consider that the aim of investing is to compound your money, your original £10k could actually be worth the several multiples of that amount that you may go on to compound it into. So, if you lose some of it, you’ve also lost all those potential compounded gains.
Steering clear of risky investments
It makes sense, therefore, to avoid risky ‘investments’ such as cryptocurrencies, geared currency bets, and punts on the price of commodities such as coffee, pork bellies, iron ore, and gold. I’d also steer clear of the shares of companies with a great and tantalising story but no actual earnings or profits, such as Sirius Minerals today.
The mathematics of recovering from losses is against you. For example, lose 50% of your money and you need to make a 100% gain just to break even, and that’s before you can even begin to make gains that will go on to compound your money. Big losses can add up to years of investing ‘underwater’ even if you do eventually recover, and the reality of that situation is that you could end up being much poorer in retirement, if that is what you are investing for.
So, to iron out some of the risks, I’d start building a portfolio base by investing in carefully chosen low-cost, passive index tracker funds. The great thing about trackers is that they minimise the risks associated with underperformance from any one underlying company.
Take a tracker that follows the fortunes of the FTSE 100 index, for example. Your investment will be underpinned by the 100 or so companies that are in the index, so one share doing badly won’t hurt your investment performance too much.
Hunting for quality
You can choose among many different tracker funds these days, covering many areas of the market. And with my first £10k, I’d probably select two or three trackers, being sure to choose the accumulation version of each one so that my dividends will automatically be reinvested to give the process of compounding a kick-start.
However, I’d also be keen to invest in a few individual shares, but to begin with, I’d look for larger companies as measured by their market capitalisations, perhaps from the FTSE 350 index.
To me, though, there’s no point in investing in an individual firm unless your research leads you to believe that the shares are capable of out-performing the index of which they are a constituent.
But I’d shun cyclical sectors all together and focus my research on companies that enjoy a strong trading niche, great economics, and resilience to general economic slow-downs.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.