Over the past five years, more Brits have started investing than ever before. Around 33% of Brits now own shares, while two-thirds say that they plan to buy stocks and shares in the future. If you’re one of the millions of people considering investing for the first time, it is important to be able to cut through the noise and understand the fundamentals of sound investing.
This way, you can avoid unreliable get-rich-quick schemes and begin to build the foundations of your wealth over time. With that in mind, here are our golden rules for first-time investors.
Do your research
Being well-informed will empower you to make more responsible investment decisions. This is why you should always take the time to conduct thorough research on investment fundamentals and current market trends.
There are many resources you can consult to get a broad understanding of the essentials. For example, beginner investing guides offer expert, digestible insights into the how, why, and when of early investing. A little bit of reading will go a long way.
A thorough understanding of risk will help guide your investment goals throughout your life. Remember, the risk is not fundamentally bad, and every high-yield investment portfolio will necessarily have a certain amount of risk attached.
The goal is to figure out exactly how much risk you can stomach and how well this aligns with your investment goals. For example, most experts will tell you that it is better to incorporate a greater level of risk in your portfolio when you are younger, as you will have more space to recover if those risks do not pay off as you hoped.
When hunting for sober investment advice, “diversify” is probably the word that you will hear more than any other. In a nutshell, this means having a broad and diverse range of asset classes in your portfolio. It means investing in stocks across a broad range of industries and exposure levels.
It means investment in stock market counterweights such as government bonds, which tend to grow inversely to stocks and shares. It means incorporating a certain level of “safe haven” assets such as gold into your portfolio. A diverse portfolio is more likely to succeed and grow long-term, even when the markets are rough.
We cannot stress this enough. If you are investing as a means of building wealth for your later years, then you must invest as regularly as possible.
Many serious investors will devote a certain portion of their income every month to their portfolio over many years so that they can take advantage of compound returns and build a nest egg that will be of genuine use in retirement.
There is no sure-fire approach here, but a widely accepted rule is the 50:30:20 ratio. This argues that 50% of your income should go towards your needs, 30% should go towards your wants, and 20% should go towards investment (and towards servicing debt). Only invest what you can comfortably afford to.
With these simple investing rules, you can use your disposable income to build wealth over time, with minimal effort involved. Remember, the sooner you start, the better.