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Being financially empowered is important for our freedom but many people, especially women, find investing dificult or scary. This is a step-by-step guide to easy investing for beginners, to enable you to invest in yourself financially and control your own financial future.
You will learn what is the easiest way for a beginner to start investing in the stock-market and by following this step-by step guide you can start investing in your future today!
Easy Investing for Beginners – Why We Need It
A few years ago, I was having a conversation about investing with two of my female colleagues over lunch. One was in her early thirties and the other had just turned forty.
Both were highly educated and working as project managers, responsible for multi-million-pound projects. Both had good salaries and thought taking responsibility for your personal finances was important.
None of them were investing however, or had ever opened an investment account. Why? Because they were never thought how and why.
We don’t learn about money in school and the financial industry is great at making investing seem complicated and scary. A lot of smart, well educated people go through life without the healthy finances (and wealth) they could so easily have.
My colleagues are not alone. Data from YouGov Omnius from 2018 shows that 52 % of women have never held an investment product in the UK, compared to 35 % of men.
The study goes on to show that many, both women and men, thinks investing is a good idea but that they are not keen on doing it themselves because of lack of understanding and knowledge.
Read More: Financial Independence for Women: 7 Steps to Financial Empowerment
Why Should I Invest?
Why should we learn how to invest? Isn’t it enough so pay your bills and save what’s left? The reason is inflation. Inflation, as I’m sure you know, is how much the average price of things goes up over time.
This means that our money is worth less as time goes by. Over the last 30 years, the average inflation in the UK has been 2.54 %. That may not sound like much but what it actually means is that if you had £1 000 in cash in 1990, what that money could buy in 2020 would only equal £460. That’s less than half of what you had in 1990!
Now, let’s assume that you put your £1 000 in a bank account that, on average, gave you a 1.5 % interest rate. That would leave you with the buying power of £731 in 2020. Better than £460 but still not the £1 000 you started with.
What we want to do is to make your money work for you. This way, over time, you have more money than you started with. Not less.
There are several ways of doing this. You can invest in property that you rent out for example. That takes quite a lot of effort and know how however. Not to mention some money up front to be able to buy your first property.
Easy Investing for Beginners
I’m no expert in real estate and as this post is about easy investing (for beginners), so we will focus on how to invest your money in the stock market. That is something which you can do with minimal effort. Another benefit is that you can start investing with a really small amount of money so no need to save up first!
I also want you to consider is that in the UK (and many other parts of the world), your workplace pension is invested in stocks and bonds by the pension company.
This is your money. The money that should keep you housed, clothed and fed during retirement. If you don’t have a basic knowledge of how the stock market works, you are leaving your retirement completely in the hands of companies whose first priority is their investors, not your pension.
By learning easy investing for beginners you will also learn how to invest for retirement.
Read More: How Much Should You have Saved for Retirement at Your Age?
I hope that you can see that if you don’t invest your money, you will have less the more time goes by. By gaining an understanding of investing, you will no longer be scared.
You will start seeing that the risk you are taking by keeping your money in a bank account, where they will go down in value, is a much greater risk then investing in the stock market as long as it’s done in the right way.
Sounds scary? Complicated? Risky? It doesn’t need to be, and I’ll show you how. This is the complete guide to easy investing for beginners.
Investing Makes all the Difference
Let’s again take that £1 000 in the 1990 and assume that you invested it in the stock market.
The FTSE 100 index represent the top 100 companies on the London Stock Exchange and since it started on 3rd January 1984 the average return has been 7.8 %.
Using this average, your £1 000 would have been worth £4 655 in 2020, taking inflation into account. That sounds better, right?
Better than £460 if you had kept them in cash or £731 if you kept them in a 1.5 % savings account.
Investing and Risk
But what about the risk? We all know that the stock market goes up and down and that a lot of people have lost a lot of money in the stock market.
That’s absolutely right, and usually it happens because people want to beat the index. To get greater returns that they would have got just letting their money increase together with the market.
JL Collins explains this brilliantly in his book “The Simple Path to Wealth” and if you have any interest at all in understanding the stock market and the power of indexing, I strongly recommend that you read it. To me, it’s the best book to read when you start investing.
It’s true that the stock market has gone up and down a lot over these years. Many of us remember the big crash in 2008 as well as the more recent crash in 2020 caused by the COVID-19 pandemic both causing the markets to go down over 30 %.
Who lost their money in those crashes? Those who got scared and sold. Those who did nothing, or even better could invest some more money (as a crash in the market is really just stocks on sale, and don’t we all love a good sale!!) will see the market recover and the value of their investments return with them.
This is why investments should always be for long-term. Preferably for more than 5 years so don’t invest your holiday money or your emergency fund.
If you happened to lose your job in the COVID-19 pandemic, having that emergency fund would make sure you had money to live on and didn’t have to sell any investments in the middle of a market crash.
Read More: Long Term Financial Goals: Step-by-Step Guide to Success
The recommendations I give on this blog are based on historical data and are not a prediction for the future. Never invest in something you don’t understand.
You make decisions on your investments and I will not take any responsibility for what you do with your money. End disclaimer.
What is the Best Easy Investment for Beginners?
My suggestion is that you invest in a low-cost global index fund, and that you set up a direct debit to auto-invest on a monthly basis. If you live in the UK, I suggest any money not going towards your pension is invested in an investment ISA.
(Most countries have their own version of investment accounts with tax benefits, find out what is available for you)
That’s it. A one-time set-up and then your financial future is automated and you can go on with your life, knowing your money is working for you.
Let me break that down:
Being financially literate is a powerful thing, especially for women.Otegha Uwagba
Easy Investing for Beginners
Invest in a Low-Cost Global Index Fund
Investopedia defines a mutual fund as “a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments and other assets.”
Mutual funds come in two types:
1. Actively managed funds where a fund manager is trying to beat the market
2. Passive index funds where the fund aims to mimic an index
The reason I’m suggesting an index fund instead of an actively managed fund is for two reasons:
First, very few fund managers beat index over the long-term, and
Second, because of the costs. Which? Magazine wrote in an article from November 2019 that actively managed funds usually charges 0.75 % to 1.25 % in annual management charges, while index funds have charges between 0.1 % and 0.85 %.
These percentages again sound small but as we are starting to see, small percentages can make a big difference over time.
Choose Your Index
We then should choose what index our fund should be tracking. Here, I would recommend a global index. You may have heard investors talk about diversification and minimising risk. They often mean that they are holding a lot of different assets (different mutual funds, stocks, bonds, property etc.).
By tracking a global index, we are tracking the entire stock market all over the world, and that’s as much differentiation that we need for our purposes.
I personally invest in Vanguard’s FTSE Global All Cap Index Fund Accumulation which has an annual management charge of 0.23 %. This fund seeks to track the performance of the FTSE Global All Cap Index.
This index only started in 2003 so we don’t have 30-year data but this fund has to date (Dec-20) increased with an average of 10.41 % since it started.
The word accumulation, at the end of the fond names means that any dividends (income) is re-invested. Many stocks pay out dividends to their shareholders, and by having a fund that re-invest the dividends into the fund, rather than paying it out to you, you invest this income.
Investment ISAs and Platform Fees
To (legally) avoid paying tax on the money we make in our global index fund we want to hold it in an Investment ISA, assuming you live in the UK. Just as we can have an ISA to avoid paying tax on our savings we can also have an investment ISA and any investments we do within the ISA are completely tax free. Forever.
As with a savings ISA there is a limit of how much you can put in every year and the current limit in 2020 is that you can save and/or invest a combined total of £20 000 in each tax year.
The beauty of this is that as we continue to put money in year after year, we can build up large investments completely tax free.
If you have more than £20 000 to invest each year good for you!! If so, you are fine investing in a general investment account, just be aware that any gains will be subject to capital gains tax.
Platform Fees and Ongoing Charges
When you chose your ISA provider, shop around and make sure that you like the platform as well as their fees. Many ISA providers takes a “platform fee” or similar for you to use their services and there can be other ongoing charges as well.
I again use Vanguard’s investment ISA which has an ongoing fee of 0.15 % per year. Before learning about investment charges and fund charges I used Barclays Smart investor platform.
Barclays charged a minimum fee of £4 per month which is £48 per year. If you have £10 000 invested £48 is 0.48 %. I also had a number of different mutual funds with average charge of 1 % per year.
This way, I ended up paying almost 1.5 % in charges when I was with Barclays, compared to a total of 0.15 % +0.23 %=0.38 % with Vanguard. Another difference is that with Vanguard there is a cap of the platform fee if you have a lot of money invested but no minimum fee. Barclays on the other hand has a minimum fee but no maximum.
Inflation and Fees
The gains on our investments will be reduced because of inflation. Therefore we want to make sure that the fees we pay to the ISA platform provider and fund manager are as small as possible. The fees will greatly eat into how quickly our money will grow.
Using the FTSE 100 index as an example, as we have long term data for it, the average annual growth was a 7.8 %. We then have to remove 2.53 % for inflation and another 0.4 % – 1.5 % for fund charges.
As an illustration, our £1 000 pounds in 1990 would have grown to £4 152 with fees of 0.4 % (invested with Vanguard) and £3 026 using 1.5 % charges (Barclays). That’s a big difference.
Companies change their charging structure regularly, and they try to make sure you don’t notice how much you are paying them. When you look for an ISA provider, make sure you understand the charges and I would recommend paying a maximum of 0.5 % in total fees on your investment.
Anything above that really is just giving away your money (and your future!).
Easy Investing for Beginners: Set Up a Direct Debit
The key to financial success is to pay yourself first and everyone else second. Set up a system that is in line with your goals. By setting up a direct debit to your investment ISA and telling your ISA to automatically invest in your global index fund, you will secure your financial future while you are out doing something fun!
By regularly investing in your global index fund you will further minimise the risk to your investment.
Again, JL Collins can explain this a lot better than I can and I really recommend his book, but by investing regularly you avoid the human risk of trying to time the market.
Your money will go into the fund at whatever price it is at the time, and as the stock market so far always have gone up (more than inflation) you will end up better off in the long run.
Easy Investing for Beginners: Compound Interest
Using the same assumptions as previously with a 7.8 % average yearly increase in the stock market, inflation at 2.53 % and charges of 0.5 % we would get an annual increase (in today’s money) of 4.77 %. These are very conservative numbers and most of the financial literature assumes 5.5 % – 6 % after inflation and charges.
Using 4.77 % and assuming you save £100 per month for 10 years you will have invested £12 000 but you will actually have £16 132. That is more than £4 000 more than you put in!
This compares to the £11 453 pounds you will have in today’s money (compared to the £12 000 you invested) if you put the money in a savings account with 1.5 % interest assuming 2.53 % inflation.
Investing is not only for bankers or middle-aged men. Investing is for everyone and the earlier you start the better your financial situation will look as your money will work for you.
By taking a long term approach with low associated costs you can maximise your potential without having to spend your time analysing the stock market.
How to Review Your Investments
As little as possible. The market will go up and down and if you look at your investments every day, the risk that you will get scared by a market drop and be one of those losers who sells when the market is going down, increases significantly.
As we are looking at this from a long-term perspective, you shouldn’t look at your investments more than monthly and you don’t need to do it more than annually.
I usually take a look at my investments on a monthly basis, mainly because I can’t help myself. However, I also have a yearly reminder in my digital calendar telling me when it’s time to to a more thorough review. On this day I track the value of my investment to see, over time, if the investment is performing as expected.
At this time, I also check if I’m happy with my monthly contribution or if I want to make any changes. If I have a significant change in circumstances, I would also review my investments to make sure I have the full picture of my financial situation, especially if this change is making me dip into my emergency fund.
Read More: When Your Life Changes – Update Your Budget in 3 Easy Steps
Easy Investing for Beginners: Start Investing!
It is time. Visit Vanguard or any other platform of your choosing and set up your investment account. Set up your direct debit and see your future become brighter every day!
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