Investing Basics: Getting Started as a DIY Investor

Once you have decided that you are ready to take control of your finances you may feel a mixture of euphoria and trepidation; it’s a momentous decision and one that comes with not little responsibility – after all, if it were to go wrong, you are the investment manager!

We explore the principles of asset allocation in greater depth elsewhere on DIY Investor and include suggestions as to how you can set your goals and construct an investment portfolio that allows you to achieve your objectives within your tolerance for financial risk.

We also include case studies in which people just like you have approached the matter and what their experience has been.

Whilst every investor may differ slightly in terms of their personal circumstances, risk appetite and desired outcome, there are some fundamental considerations that should underpin any DIY investment strategy:

Keep it Simple

Albeit that you are embarking on a serious journey, there is no reason why investing shouldn’t be fun and the more engaged you are in the process, the more positive the likely outcome.

It makes sense to select an execution only broker, fund supermarket or investment platform with the range of investment options you require and a pricing model that delivers best value in the investments you are likely to make.

Selecting an online broker allows you to see all of your investments in one place, and to set alerts or triggers should any of them trade out of parameters that may give you cause for concern.

Execution only (XO) brokers or fund supermarkets use the buying power they possess to drive down the cost of investing, often negotiating away initial fees on fund purchases and reducing annual management charges; some also offer regular investments into selected products at very low cost.

Online platforms make it very cheap for the DIY investor to construct and monitor an investment portfolio, and it should be possible to achieve diversity in terms of industry sectors and product types all in one place.

Manage Your Risk

When managing your own investment portfolio there are two distinct types of associated risk.

The first is that the companies or products you invest in perform badly, or less well than you had hoped, and the value of that investment falls; in extreme circumstances it may even be wiped out.

The second risk in terms of achieving your overall objectives is that the investments you make grow too slowly and therefore do not allow you to achieve your required portfolio value at any given milestone.

Before you consider how best to address these eventualities it is important that you understand and in some way quantify your attitude to risk; you will doubtless have an instinctive feel as to whether you are comfortable with investment risk, but it is worth applying some form of process in the way that a financial adviser would when conducting a fact find. There are a number of online questionnaires that will help and some can be found on this site.

If rises and falls in the value of your investments keep you awake at night then investing in stocks and shares may not be for you; if keeping your cash secure feels more comfortable to you then you are probably a saver rather than an investor, although you may have to come to terms with the fact that inflation could erode the real value of your money.

‘over the past twenty five years the UK stock market has delivered a 650% uptick’

However, those prepared to see the value of their investments fall as well as rise could be rewarded with greater returns over time, although as the disclaimers are obliged to point out, the value of your investments may fall as well as rise, and you may get back less than your original investment.

However, with dividends being reinvested, over the past twenty five years the UK stock market has delivered a 650% uptick, the equivalent of turning a £10,000 investment into £65,000; accepting that ‘past performance is no guarantee of….’ etc , that is a powerful demonstration of the reward that can be achieved by those willing to accept more risk with their money.

Create a diverse portfolio – risk associated with performance can be reduced by selecting a range of investments within an asset class – shares in different companies in different industry sectors or markets – or by investing in different asset types – funds, bonds or shares, for example.

There is no balance of investments that is considered perfect for all eventualities, neither is there a model of diversification – some may favour equities, whilst others may swear by property; whilst there may be no harm in having a slight bias in the direction of your preferred investment type, it rarely makes sense to be entirely dependent upon a single investment type.

The risk of under-shooting your goals can be mitigated by adhering to two of the golden rules of DIY investing – invest for as long as you can, and keep your associated costs as low as possible.

The Long Haul

It has been shown that the longer you hold shares for, the more likely you are to beat the returns achieved from cash.

Stockmarket investments are inherently more volatile than cash savings and for time spans less than five years, there is an increased likelihood that you may get back less than your original investment; however, the very nature of such volatility also means that it could also be possible to generate a good return quite quickly.

Whilst there are no guarantees, generally stockmarket investments of five years and above should give you a better chance of outperforming cash deposits and the more risky your investments, the greater the potential for your wealth to grow over time; however, you may have to watch the value of your investments fluctuate widely, and if you need to liquidate your investment at a particular time, you may realise less than your original investment.

Keep a Watchful Eye

A key decision is whether you are confident to create and monitor your own investment portfolio or whether you would prefer to take advantage of the professional managent and inbuilt diversification delivered by funds.

Online platforms make it relatively cheap and simple to research and construct a diversified and balanced investment portfolio, but that is just the beginning.

‘your investments may be too gamey for your personal risk tolerance’

It is vital that you monitor the performance of your portfolio over time as market conditions change and your personal circumstances and objectives evolve.

Your account should allow you to monitor the performance and balance of your portfolio and take remedial action quickly and cheaply; tools such as alerts and limits mean that you should not have to frantically reach for your mobile device throughout the day – if you do, your investments may be too gamey for your personal risk tolerance.

You can also choose to receive news alerts germane to your investments, or set watch lists to follow the performance of companies in which you have an interest in as potential future investments.

It is good DIY investing discipline to set aside an hour or so, on a regular basis, to monitor your investments and make any required adjustments – this is what an adviser would go through with you, except it would come with a healthy price tag – and all the information you require to do so is readily available online.