How to Choose Investments
FOR beginners, the most difficult thing to do is decide where to invest their hard-earned cash.
There are so many funds and stocks that it can be very confusing when starting out.
I always tell people that the best thing to do is keep things as simple as possible.
These are the easy steps I use to invest…
1. Use tax-sheltered accounts
In the UK this means an ISA and a pension. In the USA use your 401(k) and IRAs. Don’t let the tax man steal some of your returns! Read more about ISAs here.
2. Don’t buy individual shares at first
This is too risky for the rookie investor. It’s dangerous to gamble on just a handful of companies (especially small ones) and you could lose a lot of cash if things go wrong.
It’s too much like putting all your eggs in one basket.
3. Instead buy the world
A much better plan is to invest in the global stockmarket as a whole using index funds.
This is like buying thousands of companies all over the world. It spreads the risk and gives you a diversified portfolio.
4. Keep charges low
When costs are lower, you get to keep more of your returns. And making money is what we’re all about, right?
That’s why I don’t pay financial advisors or choose investments that have high charges.
If your fund wants more than 0.25% of your cash every year, you’re probably paying too much.
5. Make regular purchases over the long term
If you do this, it doesn’t matter if the stockmarket rises or falls. You’ll just pay an average price.
It is impossible to time the market anyway. Time in the market is what counts.
6. Keep calm
The biggest mistake people make when starting out investing is they panic at the first downturn. Don’t sell at a loss.
Remember this is a long-term plan. Stick to your strategy.
I don’t even bother looking at how my investments are performing day to day or even month to month.
About once I year, I’ll take a look. Why? Because I’m not planning on needing the money for ten years so it doesn’t matter what the stockmarket is doing.
My main investment…
I’ve written before that I’m a big fan of Vanguard’s Lifestrategy funds. They really are a one-stop shop for the beginner investor.
Just in case you were wondering, I’m not paid by Vanguard to recommend them – I’m only telling you where the bulk of my portfolio is invested.
I always put my money where my mouth is, and the core of my S&S ISA is invested in the Lifestrategy 80% Acc fund.
This version has 80% in shares, 20% in bonds, and follows all the rules stated above.
All I do is make those regular purchases and let it work away.
I love this type of fund as it makes investing so simple.
I don’t have to worry about which countries to invest in, or if my portfolio is becoming unbalanced. I just fire the money in, forget about it and get on with my life.