When I graduated from university back in 2011, I wanted to invest in the stock market. The only problem was, I had no idea what to do.
No one had ever taught me how to start investing. The subject was never mentioned in school, nor was it mentioned by anyone at university in the talks held before we graduated.
I knew it was a good idea to start investing due to the laws of compound interest, I just didn’t know how to begin.
Eventually, I got sidetracked with my new job, then subsequent travelling and living in various countries for five years before I found myself back in England, a little worse off financially and still without any idea of how to invest.
It was around this time that I decided to get serious about investing. I came across a quote which summed up the reason why: “The best time to plant a tree was twenty years ago, the second-best time is today.”
This quote sums up the importance of investing. The earlier you do it, the better off you will be down the road. The problem for many is that getting started is often the hardest part.
I was in this situation a few years ago, utterly clueless about what to do. Now I have much more confidence and knowledge about investing in the stock market that I can’t believe it took me so long to jump in.
Below are four easy steps that anyone can follow to start investing and put your money to good use!
Download an app
When I left university in 2011, apps were still a novelty. Today, they are a key part of the functionality of our mobile devices. The saying there’s an app for that, has never been truer.
To start investing today, all you have to do is download a trading app and you’re good to go. Robin Hood is a popular app, and if you live in Europe,
Freetrade is an excellent app, which charges nothing to buy and sell shares!
Once you’ve downloaded the app and followed all the procedures on-screen, such as completing a W-8BEN form to declare you’re not a US tax resident if you live outside the US, you’re good to go!
Screenshot of the Freetrade app.
Sure you can do things the old school way through a brokerage but why bother? What’s the point when you can download an app and buy and sell stocks without paying any commission?
It’s never been easier to invest in the stock market than it has today. Once you’ve got your app up and running, you’re ready to start adding stocks to your portfolio.
Research, research, research
I remember when I first downloaded Free Trade to my phone and deposited some money into my account. It felt like Christmas had come early. The problem is that once you set up an account and you’re ready to go, the temptation to splash the cash is strong!
The stock market is unpredictable and your money is at risk. If a stock tanks, or goes bust and you invest in it, that’s your money gone. That’s why it’s important you do your research before you buy any stocks.
My first suggestion would be to buy a personal finance book that will help you sort your finances out and give you guidance on how to structure your portfolio. I Will Teach You To Be Rich is a great book to start with, which helped me a lot.
The temptation with the stock market is to invest in companies that you know, while this isn’t a bad idea, it’s not the best one. Yes Tesla is a great company, and I am a shareholder, but the stock is worth a lot more today than it was when I first invested!
The best place to start for beginners in the stock market is with index funds. These funds contain the biggest companies pooled together into one big fund. You won’t get the super-high returns that you might get if you invested in a standalone company, but they are much less volatile.
If one company in the fund goes bust, they are replaced with another and you don’t lose any money. Funds such as Vanguard are renowned for pulling in returns consistently year after year. If you invest a steady amount each month, that can be worth a lot in five years.
If you’ve got your heart set on owning a particular stock. Head on over to Yahoo Finance and dive into the fundamentals of that stock. Check out its balance sheet and its quarterly performance. If you don’t know what’s going on after reading all of this then you should probably stick to index funds!
One of the most important aspects of any portfolio is to diversify. The author
Nassim Taleb is renowned for his famous barbell strategy, which advises you to invest a lot in extremely safe investments and then put some money into speculative bets.
This is probably too complicated for most beginners, so another good idea is to follow Ray Dalio's all-weather portfolio strategy. This is a much more achievable and easy way to start investing for most beginners.
What you want to do with the all-weather portfolio is spread your investments across several assets. So, you’ll invest in stocks, long-term bonds, medium-term bonds, gold and commodities.
This way you're protected in case the stock market goes into freefall. By doing this, you’re protecting yourself against Black Swan events such as the 2008 crash and Coronavirus, which can and will happen.
If you put all your eggs in one basket you’re risking financial destruction. Imagine if you had only invested in Enron shares before its collapse in 2001. You’d be out of money and out of luck.
Diversification means that when the markets take a turn for the worst, you’re protected. When stocks go down, money often moves into safer bets such as commodities and gold, which are considered to be a store of value. So as your stocks fall, your other investments compensate.
It’s a strategy that plans for the long-term and means you won’t suffer the same fate as multiple investors during the Wall Street crash in 1929 or the Financial crash of 2008 who lost it all.
Invest every month
Now that you’ve got your portfolio up and running, you want to make sure that you keep putting money into it every month. This way the value of your portfolio increases and you can let compound interest work its magic.
The easiest way to do this is to set up a direct debit from your bank account. When your paycheque goes in every month, the amount is automatically debited into your trading app ready for you to invest.
This may sound daunting especially if your paycheque varies from month to month, but there is a method behind the madness. If you don’t do this, it’s easy to forget to put more money into your trading account.
The problem with this is that you’ll end up missing out on long-term growth and, even worse, completely forget to invest. Setting up a direct debit means you don’t have to think about moving your money around every month, it’s already done for you.
This makes it easier to get into the investing habit which frees up your time and brainpower for other more important matters. Investing is a lot like writing, if you keep showing up and make smart choices, the time and effort you put in will eventually pay off.
Whatever you can do to streamline that process will only expedite your returns.