Five steps for first-time investors

Buying your first share or fund can be as daunting as getting behind the wheel for the first time. Sam Meadows is here to help

Investing in the stock market for the very first time can seem a daunting task. But a decade of low interest rates has caused returns on cash savings to be greatly diminished, forcing many people to consider shares if they want a decent return on their money. In 2017 the FTSE 100 index gained 11.9pc, and over the past three years it has returned 31.5pc. By contrast, savings rates are typically about 0.5pc.

But setting up a savings account is relatively straightforward and involves no risk to your cash, other than inflation. By contrast, investing in the stock market – with thousands of companies and a plethora of funds to choose from – can seem an altogether different challenge, even once you have decided to stomach the risks.

Like many problems, it is more readily tackled if you break it down into component parts. Here is our five-step guide.

The first thing any first-time investor should do is decide on their goals, which in turn will determine the time horizon over which their investments can be left to grow.

If your goal is a short-term one, such as saving for the deposit on a house that you hope to buy in the next few years, the risks and volatility of the stock market mean that cash is likely to be the appropriate home for your savings.

Any money earmarked for retirement, on the other hand, will be well placed to benefit from the longterm potential of stocks and shares.

Alistair Cunningham, of Wingate Financial Planning, said: “Getting the time horizon right is important. Pension money may not be touched for decades, and studies show that exposure to stocks and shares is likely to give the best return.”

In order to start investing in the stock market you’ll normally need an account such as a stocks-and-shares Isa or a pension. Most high-street banks offer the former, which will connect easily with your current account, but these options are unlikely to offer a particularly flexible choice of investments.

Online investing services such as Nutmeg win points for ease of use. The investment choice is deliberately limited and it usually consists of a selection of high, low and medium-risk portfolios.

For truly flexible choice on where your money is invested, the best option will be a “fund shop” or investment “platform”, which will allow you to put money into shares and funds easily.

Choosing the best fund shop will be based on several factors, including cost, and the cheapest option will depend on how much you have to invest. For those with less than £5,000, Bestinvest and the Close Brothers Self Directed Service are the cheapest, while Fidelity, Hargreaves Lansdown and AJ Bell are not far behind.

For those who look beyond cost, reviews on Stockbrokers.com and the views of investment expert Holly Mackay of Boring Money, a guidance service, suggest that Hargreaves Lansdown is in first place for customer service and the usability of its mobile app.

Ms Mackay said Hargreaves and Fidelity had the most usable websites, while AJ Bell, Interactive Investor, Hargreaves and Barclays Smart Investor had some of the best investment choice available.

Once you have set up an account, you will be able to choose whether to invest directly in companies by buying their shares or indirectly in a number of businesses via a fund.

If you invest directly in shares, your Isa or pension platform will charge for each trade and there could be stamp duty to pay, but you will avoid the management fees that come with funds.

However, investing this way is complicated and requires extensive research and you would need to ensure proper diversification by investing in a wide range of companies.

Funds offer a ready-made collection of stocks put together by a fund manager. This gives you some instant diversification, although some funds specialise in a particular sector.

Certain funds dispense with a human manager and simply buy every share in an index, such as the FTSE 100. Such funds, called “index trackers” or “passive” funds, are much cheaper to run and their popularity reflects the fact that even expert fund managers find it hard to outperform the wider stock market consistently. Anyone who chooses to invest directly in shares will, as mentioned already, need to carry out plenty of research. The Telegraph’s Questor column is a good place to start, while fund shops typically offer plenty of data to help you make your selections.

If you choose to go down the fund According to Fund Expert, the biggest mistake among first-time investors is tinkering with their portfolio too often.

Investing in the stock market is a long-term project and the best returns will be made by choosing a strategy and sticking to it, even if there are bumps along the way.

Mr Cunningham agreed, saying: “Set things up and leave them alone. This might sound counterintuitive, and I do encourage structured reviews, but there’s likely to be more potential for harm by tinkering too frequently.

“When a portfolio falls, as it inevitably will from time to time, the best advice is often to hang tight.”

‘When a portfolio falls, the best advice is often to hang tight’

On the road: first-timers need to decide on their goals, choose a firm through which to invest and then buy shares or funds