S1E3: How to start investing | MoneyWeek Digital Editor Kalpana Fitzpatrick
Kalpana Fitzpatrick is the Senior Digital Editor of MoneyWeek and the author of a few finance books including Invest Now. She’s here to explain how to get started with investing because it’s a key wealth building tool. In fact, as we learnt in Episode 2 with Andrew Craig, it’s how most rich people became rich.
What you should remember from this episode
Investing can be simple - as simple as putting money into a savings account.
Investing is “not get rich quick, it’s get rich slow.”
You should consider investing as a way to build wealth once you’ve built enough savings for an emergency (your ‘emergency fund’), which most advisors say should be 3 - 6 months of your income.
Of course you need cash for life and emergencies, but above a certain point it doesn’t make sense to keep your money in cash because inflation eats away its value. Investing can be a key lever to beat inflation and grow real wealth. Remember from Episode 1, the US stock market has grown at 9% a year on average for 150 years, which generally is a better return than the interest you’ll get paid on cash, e.g. in a savings account.
Consider investing money that you’re not going to need in at least the next 3 years or more. This is because investing is for the long term, ideally decades. If you’re going to need that money in the short term (less than 3 years, some even say 5 years) then the general advice is not to invest it because its value might decrease in the short term.
You need to be comfortable with short term fluctuations which can see the value of your investments go down.
Although the US stock market has returned 9% a year for 150 years, that’s an average. Most years it’s a big swing - it could be up 21% one year, down 12% the next - but that’s a feature of the system, not a bug. You can see it in the graph below of the S&P 500 - the green years are up and the red years are down. For that reason try not to look at your investments too often. It can cause anxiety. Ideally you ‘set and forget’.
As Kalpana says, pulling your money out of your investments when the markets are down is generally a mistake because these dips have always been short term blips compared to the long term trends. This is why you have to be able to zoom out enough and take a long term view. Have a look at this chart of the S&P 500, for example. You can see that over time it has grown significantly, even though there have been several dips along the way, like the 2008 financial crisis (one of the big red lines in the chart above). If you had been able to hold onto your investments through the dips, you would
Investing in stocks, also called shares, and also called equities (annoying right) means you get to own a slice of that company or companies. As the companies grow in value, so do the value of your investments.
You don’t need to pick individual companies (stocks) to invest. You can invest in funds which invest in multiple companies, so you’re not relying on one company doing well.
An index fund is a very common, very useful way to invest in multiple companies and indeed the stock market. They are funds which invest in many companies which are listed on particular indexes, e.g. the FTSE 100 is the biggest 100 companies listed in the UK, the S&P 500 is the biggest 500 companies in the US and so on. Investing in an S&P 500 index fund is one of the easiest ways to invest in the US stock market as a whole because you’re investing in the top 500 US companies. And remember, the US stock market has grown at 9% a year on average pre inflation.
There are several advantages of an index fund. It diversifies risk by investing into many companies. It’s simple and easy to buy. And the performance of index funds is generally better than people who are picking stocks (active funds). This is true even of professionals - only a handful of professional investors have beaten the market over the last 30 years. That’s why Warren Buffett is such a ledge.
You don’t need to be an expert to get great results. It seems counter-intuitive but the best long term results generally come from the easiest way to invest - buying an index fund which tracks a particular market like the US.
It’s good to invest consistently - a certain amount every month. Investing is like going to the gym, it’s about consistently showing up.
The younger you start the better because time is your biggest ally because of compounding.
You don’t have to be rich to invest. If you can afford to invest £25/month, you’ve got enough money to start.
What you should do after this episode
Get started investing (if you haven’t already). Starting is normally the hardest part. Once you start you’ll gain confidence and probably become more interested. Oh and watch this clip from Andrew Craig on why investing is not trading.
You can start really small, investing whatever you’re comfortable with - and of course can afford. Remember your money is always at risk.
Try to invest consistently, a certain amount every month is ideal.
For that reason try not to look at your investments too often. It can cause anxiety. Ideally you ‘set and forget’.
Consider investing in an index fund or index funds, like the S&P 500 which tracks the 500 biggest US stocks, or even a global index fund, which is what Damo generally invests in. A global index fund invests in hundreds if not thousands of companies around the world so you benefit from the world’s growth.
Where do you make investments like this? We’ve listed some of the biggest investment platforms below (and Damo uses all of them), whilst here’s an article to help out.
Once you’ve chosen your platform, how do you pick which funds you want to invest in (if you want to invest in a fund)? Damo made this video a couple of years ago explaining more. Even though this video is specific to one platform (Vanguard) it should help you assess funds on any platform.
Consider investing first through a stocks and shares ISA. We’ll talk about this more in our next episode but it allows you to invest in the same stocks and shares you would anyway (you can invest in the same index funds) but because you’re investing through an ISA, your gains will all be tax free.
Investment platforms
Here are some of the biggest investment platforms in the UK (and Damo uses all of them too).
Some of these are affiliate links. If you purchase a product or service using one of these links, we will receive a small commission from the seller. There will be no additional charge for you.
Remember investments can fall and rise - and past performance is no guarantee of future results. Other fees may apply. Your capital is at risk.
InvestEngine
Get a £25 bonus when you invest at least £100.
https://investengine.pxf.io/daOD2Q
Vanguard
https://www.vanguardinvestor.co.uk/
This is not an affiliate link.
Trading 212
Get a free share worth up to £100 when you sign up for a new Invest or ISA account and deposit at least £1.
https://www.trading212.com/promocodes/MM
If you do not get your free share after depositing at least £1, use the promo code ‘MM’ (for Making Money). You can use this code for up to 10 days after opening the account.
