If you're going to strive for financial independence then you're probably going to need to get involved with investing your money into the financial markets and use it to generate some passive income.
But getting started in investing is quite a scary leap, especially if you were like me who had a financial education grounded on "not taking risks". For anybody not familiar with the markets, the rise and falls of the prices can be quite a nerve wracking sight.
"What if I lose all my money?"
"What if I make the wrong investment?"
"Where do I even start?"
These are just some typical questions that may cross our minds when we start to think about investing, and I'm sure there are plenty more.
But investing doesn't have to be complicated, risky or scary. In fact, as time passes and you get more accustomed to being an investor you might even find it amusing that you were nervous at all in the first place.
It's a bit like learning to swim, ride a bike, or learning to drive a car. You become more familiar and confident as you do it more, and the dangers that you felt certain of at the start will slowly fade into the background.
The dangers are always there of course, but you have the confidence in yourself to handle them.
Investing is very much the same. But for everyone there is a start and it is a little scary. So in this article I've compiled a short list of do's and don'ts to help every newcomer get started.
Do: Start Small
While you will eventually have plenty of money stashed away in your investment accounts (it really isn't that hard) you don't have to start off with a huge sum. In fact, I would argue that starting small is the best course of action for any newcomer because the point of these investments isn't actually to make money, it is to get accustomed to investing.
The money will come in time, don't you worry.
I've heard a few people say that they feel investing anything less than a couple of thousand "isn't worth it" because the returns wouldn't be that much. After all, a 10% return on £100 is "only £10"...
But this is the wrong way to look at it.
That small amount gives you a little bit of exposure to the markets meaning you can get an experience of "the ride", and it helps you get familiar with the ups and downs that are inherently a part of the market.
With just a small amount invested it means you're more prepared to take on any adversity that might happen in the early days and give it time to play out. This is much better than being exposed with a large portion of your life savings where you'd be much more likely to cut and run if the markets dropped even just a little.
Start small so that your investment journey doesn't end before it has even begun.
Don't: Be Nervous
You'll be tempted at the start to look at your investment account every hour to see how things are performing. If you see things are green then you'll be happy, but if you see red you'll probably start wondering if you made a mistake.
The secret is simply don't look.
The markets will fluctuate and that means sometimes you're going to see your investments fall as well as rise. This is healthy. So don't get nervous when you see some or even all of your investments go red - and absolutely don't sell.
Always remember that you should be investing for the long term (at least 5 years into the future) and on such timeframes it's actually quite rare for your investments to remain in the red for that whole time. Even if it does happen, just wait it out.
One of the keys to not being nervous is to not invest the money that you might actually need in your everyday life in the short term. Make sure you've got the income to cover your every day living expenses and have a reasonable amount of money set aside for any financial emergencies.
With the short term under control you'll be able to let your investments grow uninterrupted in the background over the long term.
The less you look, the less nervous you will be.
Do: Go with an index tracker
Should you try to pick out a well established company to invest your money into? Or should you try to find the next hidden gem that could rise rapidly in value over the next few years?
The answer is nobody knows.
Even professional fund managers who have teams of exceptionally smart analysts, machine algorithms and resources at their disposal find it tough to beat the market. In fact, it's apparently better to let a monkey do the work instead.
If you can't beat the market then you should simply join the market by buying all of it - and that is done by investing into an index tracker that mimics the composition of the market, thereby matching its overall performance.
Also, there's no need to decide what to buy when you're going to buy everything. Things can't get much easier.
There are different types of indexes but among the most popular are ones that track the S&P 500 (top 500 companies in the US), the US total market (broader range of companies in the US), or the global market (companies across the world). Personally I prefer one that tracks the global markets such as Vanguard's FTSE Global All Cap Index Fund as I like having some diversification into other countries besides the US.
In general though, as long as you pick a fund that tracks a well established index you are likely to do well in the long run - so go with the one that best suits your own preference and don't sweat over it too much once you've made your choice. You can always adjust in the future.
An added benefit is that it is much cheaper for you to invest into an index tracker because there's not a whole lot of work for the fund manager to do behind the scenes, and therefore less fees to be paid.
Less hassle, better performance, less cost. Win, win and win.
The financial market appears to be an incredibly complex beast with an uncountable number of little things happening in any given moment. But no matter how complex it can be you could ultimately boil it down to a simple phrase: There is strength in numbers.
Apes together strong.
It somehow seems the monkeys and apes have a natural affinity to good investment practices...
The bane of intelligence is the tendency or need to overcomplicate things.
"Surely just investing in one single index can't be enough to make me a successful investor, right?"
A lot of people get nervous by the simplicity of the index investing approach and try to find a way to appease themselves by... wait for it... investing in multiple indexes.
While there are some cases where this can be good - such as buying an index that tracks stocks and another index that tracks bonds - the same can't be said for all cases.
Imagine if you buy an index that tracks the S&P 500, buy another index that tracks the US total market, and buy yet another that tracks the global markets. The only thing you'll end up with is an improper balance - in this case towards the US economy - which ultimately defeats the purpose of buying an index in the first place.
You might argue that if the US economy continues to perform better than the rest of the world then this will be "more profitable" than simply buying a global market index (as it would have less exposure to the US), but there's no way you can be certain that this will happen.
Unless you can tell the future.
And to be honest, if you think the US economy is going to perform better then just invest into an index that tracks the US economy. Don't bother with trying to concoct some mixture of index funds that you think will be good but in reality is probably just inefficient.
Use different index funds to broaden your diversification where it makes sense, and with as little overlap as possible - like the stocks and bonds examples mentioned earlier. But always look for ways to simplify into less funds where possible - the chances are something probably already exists that fits the bill.
The less funds you have, the less you need to think about.
Do: Keep Buying
If you approach investing like it's a one-time event then it's no wonder you're going to want to try and wait for the "perfect price" before getting in. You're always going to hesitate wondering if now is the moment.
The simple solution - don't treat it as a one-time event, because it isn't.
If you buy small amounts on a regular basis - such as every month - you will eventually build up quite a sizeable investment position. This is a great way to increase your involvement in the market without actually overexposing yourself, as each time you're investing an amount that you are comfortable with.
As the market moves over time it does mean you're going to buy different prices along the way. Don't let yourself get "anchored" by a previous price that you have seen or bought.
Just because you got into the market "cheaply" last month doesn't mean you should wait for it to go back down before buying again because that may never happen. Instead you should stick with the schedule and buy regardless.
If the price does happen to fall, that's alright. You'll simply buy it at the cheaper price next month instead. And if it doesn't fall then it means you got in at a good time, which is exactly what we all want when investing.
When you keep buying on a regular basis you'll be doing something known as Unit Cost Averaging (or Dollar Cost Averaging). This means the high prices you bought in at will balance out the low prices, giving you an average price in the market.
And as the markets continue to rise over time, all of your highs and lows will be "cheaper" than the market - especially when it makes a new all time high.
So keep buying.
Don't: Be afraid of heights
When the stock market is at a high it can be quite intimidating to a new investor. To be honest, even for experienced investors it's still somewhat intimidating.
"Surely this has to go back down at some point, right?"
It's easy to think you've missed the boat under such circumstances but in reality this has never been the case. Not once. How do I know?
Because each time the stock market makes a "new all time high" it means that nobody in the past had ever missed the boat, no matter how high they got in previously. Making sense?
Yes, you could be somewhat unfortunate and buy the market just before it drops off from the high but in such situations you only have to refer back to the previous "Do: Keep Buying". Just keep buying on a regular basis.
Remember that you're investing for the long term so all you need to do is look at the index charts to see that current prices are most likely higher than they were a decade ago.
An interesting statistic is that the S&P 500 set a brand new high roughly 7% of the time between 1950 and 2015 (the year when the article was written). That's almost once every 2 weeks on average.
While the referenced article does say the highs won't often "stick", meaning there'll eventually be a drop below the new high that was set, it still makes the point: New highs are not that rare.
And even if the price does drop back down a little bit, who cares?
Just buy some more (if you have the money spare) and wait another 2 weeks or so. Easy!
Obviously that last statement is a bit tongue-in-cheek but honestly, if you know that new highs are made roughly once every 2 weeks on average then why be afraid of it. It actually sounds like a very normal state to be in.
At the end of the day don't we want the markets to be high so that we can make our profits?
Do: Continue learning
Just because you've heard of one strategy that sounds really good - like passively investing into the index over the long term - it doesn't mean you should stop learning. Ever.
This is the strategy that I personally follow and believe in but the reason behind that belief is because I've looked deeper into it, and have also looked at other strategies as well. And I continue to do so to this day.
By continuing to learn about the strategy I personally follow I can envision and mentally prepare myself for all the possible scenarios that may happen but haven't happened yet in my investment lifetime.
For example the markets are rising consistently at the moment, but what about when it falls consistently over an extended period?
I've never actually gone through such a scenario - since the crash of 2020 was over so quickly - so I don't have any real experience. In fact, many people out there don't. So the next best thing is to study these events that have happened in the past and make myself familiar with the possible outcomes so that I can be confident in my approach when it does happen.
And it will happen.
By learning about other strategies I can also broaden my knowledge and gain a deeper overall understanding of investing. There isn't one strategy that beats all others under all conditions so it's important to know about what works when, and what doesn't, and why.
You're not trying to get to a point where you can "switch strategies" whenever you feel one will work better than the other - I wouldn't recommend doing that because it's the same as trying to time the market - but you are trying to get to a point where you can be confident in staying the course.
If you know that certain alternative strategies will work better under certain conditions you can start making preparations with your own strategy to weather those conditions. And if you've done the research and feel that the alternative strategy might actually be better overall then maybe you should switch.
While all strategies are slightly different in approach there is absolutely one thing they all need in order to work - your confidence in them.
If you bail the moment things get a bit scary then you're not giving the strategy a chance to properly come to fruition.
So the more you learn, then more you can prepare for such scenarios, and the more confident you will be when the time comes.
We all want the markets to rise - and I do too. But I also want the markets to crash, because it will give me an opportunity to buy at lower prices and I know that my strategy of buy and hold for the long run will mean that whatever happens in the market in the short term, they'll be higher in the long term.
That's the confidence I've got through my learning.
Don't: Try to get rich quick
When hearing about the successes of others it will often make you wish you could fast forward your own progress somehow.
"Damn! I should have put my money on that."
You'll sometimes hear about this or that person who seems to have made thousands, maybe even more, in a really short period of time by betting on a particular stock that went up rapidly. The story will usually involve some statement about how it was "obvious" that this rise in value would happen based on some arbitrary factor that sounds feasible.
And maybe they were correct - but how many more times can they repeat it?
Such a story can appear tempting to the new investor as they start to imagine themselves making a similar move and essentially be rolling in riches within the next 6 months. But don't let your envy get the best of you because there is never a way to get rich quick without taking on a massive amount of risk.
You can double your money by betting on red in a casino, but would you use it as a consistent way to build your savings and wealth?
Over exposing yourself to risk in the market for a chance of higher returns is essentially the same practice - and if you wouldn't bet the house on one then why do it on the other.
Always keep in mind that for each story of a "winner" making massive returns from the stock market in the space of a few months, there are hundreds of others - probably more - who will have lost a large portion of their money in the same time.
The funny thing is that the "winner" this time was probably someone who lost in the past and will lose at some point again in the future if they continue taking on high risk bets. Or in fact, while they've won a bet this time around they might have lost on another bet at the same time but kept quiet about it.
So how much are they actually "making" from the markets and do you think it would be more than simply investing in the index over the long term?
I'm sure there will be some people out there who do make more than the index, but no more than would be expected based on pure luck. In time, any short bursts of luck will be cancelled out if a person continues to do what they do.
And the same would happen to you too - it's simply statistics.
Do: Give yourself permission to lose money
We all learn from our mistakes and that means we have to make those mistakes in the first place. When it comes to investing your money that might mean you're going to lose a little bit of it.
And that's ok.
While it's unlikely that you will lose money in the long run if you're investing into the index, you're most likely going to be seeing a lot of different pieces of "advice" when it comes to the different investment options.
You'll hear of people talking about certain companies that you should invest into, you'll hear about things called Calls and Puts, and you'll hear all sorts of other terminology that will be unfamiliar.
It's honestly going to be a lot to take in and you're going to feel overwhelmed. But remember, that's ok.
The thing that will stop you taking your first step into investing is a fear of losing money or possibly being "inefficient" - you're worried that you will pick the wrong option from the wide range of choices and therefore make less than you could have.
But there's nobody in the world who can tell you which of those choices will be the best ahead of time.
The only way to approach this is to put a small amount of your money into some of these choices so that you can gain the experience for yourself. Some of these might make money, and some of them might lose money.
You want this to happen.
Just don't approach it in a manner that over exposes yourself - you don't want to lose all your money at the end of the day. Think of it like trying a new food that looks weird, you wouldn't shove a mouthful in all at once.
Eventually as you try more and more things you'll develop a taste for the market and you'll get a better idea on what flavours you like best. Personally - as you probably already know by now - I like the index that tracks the global markets. But you might find something different that suits you better.
Give yourself the permission to lose so that you can learn - just call it a tuition fee.
Don't: Blindly follow "advice"
While there are a lot of helpful people out there, there are also a lot of people who simply haven't got much of a clue - and these groups overlap. It's not entirely their fault because many of those people are well-intentioned and likely think they've honestly got some sort of "sure win" investment.
I've said it again and again but here it is: nobody knows what's going to happen in the future.
Often is the case where the more someone says "it's just going to go up!" without any real reasoning besides "just trust me!" the less likely it is that they've done any true analysis or due diligence for themselves.
They've probably heard of this investment idea from somewhere else, equally lacking in detailed analysis, and jumped on board in the hopes that they'll get rich tomorrow. They're basically just playing Chinese Whispers with investments, and you know how those games often end up.
But here's the thing: You are responsible for your own due diligence.
Even if someone approaches you with an investment idea that sounds reasonably well researched, you still need to do the work yourself to verify their arguments and potentially look for things that they've missed.
The good thing about taking part in different investment communities is that you can at least sound out your ideas, or ideas you've heard, to see if it's worth looking into further. They might not be able to tell you what the future holds but they'll definitely tell you if the idea sounds a bit suspect.
At the very least, it'll help you weed out any "advice" or "tips" from fraudsters who are looking to make a quick buck from your naivety.
The bad thing about investment communities is that it could become a bit of an echo chamber. A lot of people won't realise it but they'll be easily influenced through confirmation bias - if they hear or see something they like they'll then start to disregard anything else.
It's a hard trap to avoid sometimes so don't be too hard on yourself if you do get caught once or twice - refer back to the previous "Do: Give yourself permission to lose money" and learn from it.
At the end of the day I've never been disappointed in myself when I make an investment that doesn't go well, after I've done my own research and followed my own principles. This is simply how the markets are.
But I have been disappointed when I lose money based on an investment where I simply took someone else's word for it. Because it's not like I could go to that person and demand my money back since I never did my own due diligence.
So do the work, understand that you can't win every single time, and learn from your mistakes. As nobody else is going to do it for you.
For every newcomer to the world of investing there's going to be a sea of information for you to navigate. Take your time and make your way through it slowly - there really is quite a lot to consume.
But at the same time a lot of the information can be boiled down to a couple of simple principles.
My hope is that by giving these 5 do's and don'ts it can help you make a little bit more sense of everything, and perhaps give you that little bit of courage to take your first step.
While the goal of investing is to make money the most important thing is to actually get started.
Start small, don't overcomplicate, and give it time. The rest will slowly fall into place.
Hey - just one final word before wrapping up - A few weeks ago I wrote about some "Don't dos" for your financial goals in the new year. It seems I'm not the only person who has thoughts on how the typical new year's resolution should be switched up. Mr. MedFI recommends doing a Yearly Theme instead which focuses on changing how you decide things so that it will further your goal. Definitely worth the read if you're finding yourself already flagging on your resolutions!