Until recently, I thought a moral hazard was telling a white lie to get out of a social engagement and that an Oeic was a kid in a baseball cap hanging out at a bus stop, causing trouble.
Nevertheless, I have gained an early understanding of funds and investments. While researching for work, I’ve found myself eyeing up fund charges, considering maximum drawdown and scrutinising volatility figures.
I’ve realised that I’m subconsciously taking fledging steps towards choosing my first investment and, if I’m being honest, I find this prospect pretty daunting.
Deciding to invest is a difficult decision in itself, especially when you’re taking the plunge for the first time. Then, when you’ve decided to hand over your hard-earned cash, dozens more questions come out of the woodwork, leaving you in an even greater state of confusion.
Do you invest in a bond and benefit from fixed-term security, or do you buy equities and potentially reap a higher return? But aren’t both expensive now – lots of people seem worried about a correction?
Do you invest in a mutual fund and let a manager choose you a sound investment, or do you go completely left-field and opt for an alternative investment such as gold or property? I like the idea of an expert taking over, but some point out this adds cost.
All standard queries that people ask themselves before making that leap.
However, when the questions you ask yourself become: “What happens if I lose all of my money when I can’t afford to?”; “Am I at the point in my life financially when I can invest?”; or “This is all too complex for me. Can I just lie down in a dark room for a minute?”, it’s a good idea to seek professional advice.
Being completely green to the field, I’ve decided to get in touch with some of the industry’s most well-respected professionals to ensure that it’s not me lying down in that dark room, penniless, wondering how long I can live off of the tinned goods in the back of my cupboard.
The first golden rule seems to be that the higher the risk, the greater the potential rewards. However, don’t expect your trusty government bonds to be completely fool-proof, either.
Stephanie Flanders (pictured), chief market strategist for the UK and Europe for JP Morgan Asset Management, said: “Volatility is a fact of life in financial markets and next year looks set to be more unsettled than this one.”
Flanders added: “Investors should consider looking through short-term market swings and stay invested to benefit from the uptrend in corporate earnings we are expecting to see on both sides of the Atlantic.”
“Don’t be spooked by volatility and be realistic about your return expectations.”
Summed up in the form of a cliché, patience is a virtue. A little volatility should not cause you to sell your investment and run, as you could end up regretting it later.
However, clinging on to investments like a pair of holey old socks won’t serve you well either. When it’s been a long time since they have served their purpose, it’s time to let go.
Andy Parsons (pictured), head of investment research at The Share Centre, said: “Don’t fall into the trap of becoming too attached to certain investments. A common mistake is for investors to hold steadfastly on to shares which may have served them well in the past, but no longer represent a sound investment.”
“You may find it useful to put a formal monitoring process in place by setting price limits and introducing a stop-loss system for example. Keep up to date with company and sector news and make sure to review your portfolio regularly in light of any changes in the market.”
Unless you’re investing solely in cash, which is not a very lucrative investment to make, it becomes little more than a pawn in a chess set as an asset. However, when you’re investing in bonds, equities or funds, it is vital to choose your sector based on solid research.
Parsons added: “Whether you are thinking of buying or selling, it's critical to get a good understanding of the investment itself and what will affect its performance. Gut feel is not always your friend – back it up with facts.”
Gaining a solid understanding of what you’re investing in requires a lot of research. If as a first-time investor you’re concerned about gaps in your knowledge, the answer is to avoid complicating matters even further for yourself.
Martin Bamford, chartered financial planner and managing director of Informed Choice, said: “My advice is to keep it simple. There’s often too much complexity recommended to investors, whether they are first-timers or experienced investors.”
“If you’re investing for the long term, there is absolutely nothing wrong with an equity index tracker fund, some corporate bonds and maybe some commercial property. This mix of assets tend to do the job nicely over the long term and are relatively low cost ways of investing your money.”
Trying to run before you can walk seems to be a common cause of regret among many investors. Terrified that I could make bad decisions, I asked Patrick Connolly (pictured) at Chase de Vere whether a nice, safe multi-asset fund would be a good idea for someone in my position.
He explained: “Multi-asset funds become more relevant as people get older and as they’ve got more money to put down, so they’re keen to protect their money as well as grow it.”
“If you’re just starting out and say, for example, you’re putting money into a pension and there’s nothing there to protect, the focus is just on growth.”
“If you’re a first-time investor and your early 20s, then in this circumstance you can afford to put most of your money into equities, as long as you’re happy with the risk.”
“Whether you invest in multi-assets through an individual fund or a range of different funds really depends on your circumstances.”
Regardless of what type of investment you choose to make, another golden rule seems to be that it’s impossible to predict the market and trying to do so won’t do you any favours.
Flanders said: “Trying to time the market is a really bad idea. Market lows often result in emotional decision making.”
“If you flee from the markets on the fear of further declines, you risk crystallising your losses and paying the price in your long-term savings goals.”
When you have a strong stomach in place, your emotions under control and a good level of patience, it can become difficult not to get complacent. The simple answer to this, is don’t.
Connolly said: “I think the biggest mistake I’ve made, and that many people do make, is trying to be too clever, trying to look for the next big thing, because the next big thing is incredibly difficult to find. And if you’ve found it everybody else has already found it first.”
“By the next big thing I mean taking risks that are too big, putting too much of your money into high risk areas and expecting things to perform really well, really quickly.
“The best way to become a successful investor is, rule one, to diversify, and rule two, to take a long-term approach.”
Most of you no doubt have a lot more investment experience than me – so what golden rules do you think a first-time investor needs to follow? Or are there any investment ‘rules’ you’d like the FE Trustnet team to put to the test in future articles?