First time investor: How to be a successful DIY investor
First time investor: Becoming a DIY investor means making your investment decisions without having to pay for financial advice.
This might seem a daunting prospect, but this article will help you by equipping you with the basics of portfolio construction, management and strategy.
The good news is it is increasingly straightforward to buy shares, funds, bonds and other asset classes online without having to pay for advice.
What is your goal?
Defining what you want to achieve from investing should be the first step in your investment journey. It might be topping up your pension pot – something more of us need to think about to ensure a comfortable retirement as final salary pension schemes become increasingly rare – or it could be a more immediate goal such as buying a holiday home or funding your child’s education.
Identifying realistic goals will help dictate your investment horizon, and your risk profile as well as determining the asset classes you invest in, the instruments you use and the platform you opt for.
Our range of free calculators can you help with your investment goals.
What kind of return do you need?
The first question you need to ask is: how much do I need for my investment goal? This will give you a target size for your portfolio.
You then need to determine how long it will take you to get there, which will decide the kind of annual return you need.
It is crucial to note that the value of an investment can go down as well as up, so by committing your capital you are accepting the risk that you may lose money.
If you put all your cash in a deposit account there may be less risk of outright loss, but gains are likely to be modest, and you could also see the spending power of this cash eroded over time by inflation.
‘There is a direct relationship between risk and reward’
There is a direct relationship between risk and reward.
Accept no risk and returns will almost certainly be low. Take greater risks, and the returns could be higher.
The level of risk you take depends entirely on your appetite for risk.
That in turn generally depends on personal factors, such as your investment objectives, how long you’re prepared to wait for your investment to grow, and how much of your investment you are prepared to lose.
Find out how to balance risk and reward here.
Getting started and what to invest in
Once you’ve answered those questions, setting up an account is very straightforward.
You will usually have the option of applying online, over the phone or by sending an application form through the post and the whole process can take as little as ten minutes.
You will be asked to provide:
- Your address details for the past three years
- Your bank details
- Your home/mobile number
- A valid email address to receive your password and account confirmations by email
- Your National Insurance number
- Your date of birth
- Confirmation of nationality
Once you’ve opened an account you need to decide what you are going to invest in and how you are going to invest.
If you are taking your first steps into the world of investing or returning to the markets after a period away, you may not have a lump sum at your disposal to put to work in the markets and you may be wary of committing too much of your money at once. If you are in this position regular investment can be a good solution.
Find out more about Regular Investing with EQi here.
Investing a set sum at regular intervals can allow you to gradually build a pot of cash over time.
When you’ve decided how you are going to put money into the markets, it’s time to start picking investments.
Funds are a popular choice among first-time investors because they enable you to spread risk and hand over stock picking to an experienced fund manager.
‘if you have a relatively small pot to invest you might want to consider a multi-asset fund’
Some funds require a minimum investment of £500 so if you have a relatively small pot to invest you might want to consider a multi-asset fund, which can invest across the entire investment landscape.
Multi-asset funds are usually designed with a specific risk profile in mind, so you can find one that matches your needs. Good examples include Pictet Asset Management’s FP Multi Asset Portfolio.
If you have a relatively large sum you could construct your own portfolio of up to 20 funds – any more than this would be difficult to monitor. You can see what assets and geographies a fund invests in by looking at the product factsheet.
As a starting point a good funds to consider is investment trust Fidelity Special Values (FSV) which offers UK exposure or use the screener tool to find faster growing markets overseas.
Broad-based exposure to the markets is also available at low-cost through exchange-traded funds like iShares Core MSCI World (SWDA) which could be a useful starting building block to build a portfolio around.
Check out our independent research from Square Mile to help you choose a fund based on your appetite for risk.
How to stay on track
Let’s suppose you have set your goals and made some investments. What can you expect when you start investing, what common pitfalls do first-time investors face and how often should you check on your performance?
It is easy to monitor your performance online, but it is probably sensible to monitor your portfolio at most around once a month in the early days and perhaps once a quarter thereafter.
If any of your investments are not performing in line with your expectations, then you need to consider why this might be the case.
‘it is probably sensible to monitor your portfolio at most around once a month in the early days’
You might not be managing them efficiently enough or you could be failing to close out loss-making positions before they do real damage to your portfolio.
Perhaps you have been too confident and attempted to call the market, leading to an imbalanced portfolio. Most experts agree there is a strong case for diversifying across industries, geographies and asset classes.
The end of your first year as an investor provides an opportunity to give your portfolio a health check.
Check the current allocation of assets in your portfolio and ensure it is in line with your investment strategy (find out more about strategies here). If exposure to one asset class has fallen below or risen above your targeted threshold, consider buying and selling accordingly.
Ultimately, DIY investing isn’t easy, but with a bit of care and attention you can stay on the right path.
EQi is a DIY investing platform designed for individuals. It gives you access to global markets, control over your investments and offers customers award-winning support.
By Tom Sieber