I often read that before you dip your toe into the perilous investment waters, you should do lots of research, educate yourself, set up a dummy portfolio and gradually lower yourself into the investment pool.
I’m not so sure. My tip for someone new to investing is that providing you follow certain rules, it’s best to follow the Nike philosophy: Just do it.
We’re all different and what works for me won’t necessarily work for you, but I would say, providing you follow my simple rules, you can just dive in. It’s amazing what a compelling read that material you once found to be dull becomes once your money is at stake. Education is of limited use if you’re not really enjoying it. Learning on the job, by contrast, can be enormous fun and as a result you absorb the information better and learn much faster — at least that’s how my brain works.
You must follow those rules first, though.
1. Drip feed
If you have a lump sum and you’re looking to invest it, drip feed your money into your investment portfolio, investing a bit at a time over several years. If you’re investing a part of your income each month, you’ll be automatically adopting a similar approach anyway. That way you limit your exposure to short-term market fluctuations.
2. Don’t invest in one company, sector or territory
The key to reducing the risk from investing is diversification. Even if you’re only committing a small percentage of your money to investing on day one, spread it out. This could mean that you only invest, say, £100 in any one company. I feel the benefit of diversification is worth spending extra on multiple trading fees. Make sure you invest in companies that operate in different sectors and ideally in different regions of the world. Also, and this is especially the case when you’re new to investing, diversify by choosing different types of companies — if you invest in a small company, seemingly with lots of potential, balance this with an investment in a large, stable one.
3. Invest in what you know
At first, only invest in companies that either operate in a sector you know a lot about, maybe from your professional background or invest in companies whose products you’re familiar with.
Later on, as your knowledge grows, and after extensive research, you can branch out, investing in areas of which you don’t have first hand experience.
4. Take your time
Don’t be in a hurry to sell. The biggest mistake an investor can make is to over-commit and, a few months or years later, find they urgently need the money. If you over-commit, you’re taking the risk that the moment when you need to sell may coincide with a difficult period for the stock market. Instead, only invest what you can afford to on the assumption that you might have to wait for good market conditions before selling.
Research with lots of background reading is essential, but this research becomes a lot easier and enjoyable if you’re already investing.
Follow those rules and you’re greatly limiting your risk. Under those circumstances I would say learn by doing — invest, watch and learn.