The Basics You Need to Know to Start Investing

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Six flowers in a row at various stages of bloom

You can make investing as simple or as complicated as you like.

It depends how involved you want to be, whether you think you can pick companies that will better the average return of the market, or if you just want to own shares in a specific company for whatever reason.

If you keep it simple, there’s really not too much you need to get your head around before you deposit your first amount into the market.

You learn so much more once your money is in and you can actually see your hard earned money moving with the ebb and flow of market news and events.

So if you’re feeling a little overwhelmed by all the terminology, here are just 6 of the basics you need to know/ need to consider…

Do you have cash set aside for emergencies?

The first thing you should think about, and something you should be thinking about doing even if you have no intention of investing.

You’ll hear a lot about having 3-6 months cash set aside that can cover emergency expenses should you lose your job; these are definite, monthly financial commitments that are non-negotiable. For example: rent, council tax, various household bills.

These are the basics you need to survive the next few months while you look for another source of income.

Personally, I like to have a little more set aside. I go by 6 months full wages so I can cover small treats as well as the basics while I’m out of work. I think it’s important to allow yourself some sense of normality while in this position to boost morale during such an uncertain and trying time.

How long are you going to be invested for/ What are your goals?

Nice and simple. Ask yourself, why are you investing?

Is it to supplement your retirement funds? Is it for a house deposit? Is it for your kid’s future?

The recommended minimum to be invested for is at least 5 years; hopefully this will see any large drops your portfolio experiences bounce back.

My timeline? 20 years…to supplement an earlier retirement in order to eventually BaristaFI.

What is the difference between a share and a fund?

There are a lot of different investment vehicles to consider putting your money into.

The most popular of which, within the FIRE community, are funds and individual shares. You can find definitions of the differences between the two here>>.

Essentially it comes down to, do you want to own a collection of some or all of the biggest companies in the world (funds)? Or do you think owning shares in specific companies is the best route (shares)? You could have a hybrid of both. Most of my investments are in index tracker funds and active funds, but I like to supplement this with a smaller percentage in my Freetrade Portfolio in specific companies I like the look of.

Owning a collection of companies within a fund spreads the risk and can often be cheaper than owning individual companies. But owning individual companies can offer potentially greater returns but at greater risk.

What fees will I be charged?

Investing usually comes at cost. But these costs can vary greatly depending on what you’re investing in and the platform you choose to use.

The three main costs are:

  • Platform fee – varies greatly depending on the platform you’re using.
  • Trading fee – buying and selling funds is usually free on most platforms, but buying and selling individual shares usually comes at a cost with most platforms.
  • Fund fee – funds are usually managed by a team of analysts who buy and sell the individual shares that make up that fund. The time and research these teams put into this comes at a small cost. To keep these costs down, many people choose to invest in index tracker funds which buy the whole market and are usually automated or require minimal management, and so the fund fees for these are usually a lot lower.

What is compound interest?

Compound interest is financial magic.

Your interest earns you interest which, in turn, earns you interest. In small amounts over   a short period of time this might not seem like it will have much of an impact, but over multi-decades and with the investor adding regularly consistent amounts, this can have quite positive effect on your money.

Check out this compound interest calculator to see for yourself. I usually use a conservative 5% yearly interest rate, but you can adjust this accordingly.

What is your risk tolerance?

And finally, how would you react if your portfolio dropped 20% tomorrow?

Would you panic sell into a loss or shrug your shoulders, close your laptop and get on with your day?

Over multi-decades and with a well diversified portfolio, there is a high chance any drops will recover (accordingly to historical data).

Risk should not be feared, but embraced and managed accordingly. In investing, risk is not a dirty word if you educate yourself on how to deal with it, and certainly isn’t the same as risk when mentioned alongside gambling.

If your risk tolerance is high you might want to consider constructing your portfolio with a higher percentage of equities (shares).

If you’re less risk tolerant or looking to invest for a shorter time, you might want to mitigate this with a higher percentage in low risk bonds or gilts; you might lose out on higher gains when the market is booming, but you’ll hopefully see lower losses when the market falls.

So those are my 6 basics you’ll need to understand to start investing.

A lot of investing is ‘learning on the job’ so anything more specific or strategic you can learn once you’ve begun.

I say it time and again on this blog, but one of the biggest risks (and I certainly experienced this) is investment paralysis…i.e putting off investing for fear of its complexity. But the basics really aren’t too difficult to get your head around, and once you get started you’ll get the bug to want to learn more.

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