Having money in the bank is always good – but beyond a certain point, it’s inefficient. Particularly with interest rates at their current low levels, you need to invest in assets that deliver a higher return if you want your wealth to grow. That generally means buying equities – whether individual shares, mutual funds or ETFs; though assets like real estate can generate good returns, they’re not as easy to sell if you need to liberate cash.
The easiest step to take when you start out is to invest in funds. Pick two or three general funds; you can drip-feed money into them each month or invest a lump sum. (Why not a single fund? you may ask. Many fund managers have periods of good performance and times when they don’t perform as well; having two or three funds helps diversify that risk.) Most beginners choose funds that invest in their domestic market, but it’s a good idea to get global funds which will also give you exposure to faster growing markets elsewhere.
As your portfolio grows you might want to consider taking on a little more risk and gaining exposure to greater returns by adding a couple of specialist funds such as technology, natural resources, or emerging markets.
Funds suit a less active ‘buy and hold‘ investment style, particularly if you are drip-feeding. If you want to be more active you might look at exchange traded funds (ETFs) instead. They’re lower cost than funds because instead of having highly paid managers to make stock purchase decisions, they simply track the stock market indices. You can buy a Dow Jones or FTSE index, for instance, or use ETFs to invest in a geography, sector (eg European telecoms or US tech) or style (eg high yield stocks). You can trade ETFs through most regular brokers but to make the most of the cost advantage, look for a low cost trading platform like CMC Markets.
You might also consider directly investing in stocks. However, this strategy needs more expertise and a greater time commitment. The best returns come to those who are willing to plough through the small print notes in a company’s annual report, model future earnings, and make the occasional contrarian call – buying oil stocks at the beginning of 2016, when no one wanted them, would have paid off very well indeed.
One of the biggest secrets of great investors is that you don’t have to buy and sell your whole position at once. If a stock performs well, it’s possible to take some profits by selling a proportion of the holding, while retaining part of it for future price appreciation.
These different styles of investment aren’t mutually exclusive. Many investors choose to put a proportion of their wealth into funds that they don’t need to spend much time on, enabling them to spend more time and effort on researching their stock picks or trading ETFs actively. The right balance depends on many factors – the time available, specific expertise (for instance, many investors who work in tech companies choose to invest in tech shares), and how risk friendly or risk averse you are.
Practically every investment can now be made online. Gone are the days of besuited gents in wood-panelled offices! However, every online platform is not the same. Some offer only one type of product (eg funds), and may have a limited range of product. Many are targeted at particular types of investor and can be costlier for those who don’t fit the desired profile; those aimed at higher frequency traders can work out expensive for investors who trade only once or twice a quarter. Picking the right platform can be a crucial decision, so it’s worth taking time to compare the alternatives.
The internet also delivers a fantastic array of resources for investors. Most funds and companies have key documentation available on their websites, while bulletin boards and forums complement media offerings such as the FT’s Seeking Alpha, Bloomberg and Google Finance. Many brokers and trading platforms also provide significant education and information resources to their customers – well worth taking into consideration when making an educated choice.
By all means have a couple of month’s money in the bank, in case of emergencies. More than that, though, and you’re missing out on the much greater returns that can be gained by investing for the long term. It’s time to get started!.