"Interested in investing but have no idea where to start or the risks involved. Check out this great piece from Rory Gillen and get pointed in the right direction."
In my experience many private investors fail to get the returns on offer from markets due to excessive trading, a lack of understanding of how to value an asset, misunderstanding the risks and a lack of emotional control during more volatile market conditions. This short introductory article on sound investing is aimed at clarifying some of the basics.
It's often worth reiterating some areas of the markets that would-be investors might avoid while outlining some basic issues that need to be understood.
To kick off, avoid spread-betting and contracts-for-difference (CFD) accounts like the plague. Both encourage you to trade markets, and often using borrowed monies. Recognise that if you try and trade markets, you are just speculating, and you might as well be down in the bookies.
In addition, if you trade markets you are up against professional traders. The professionals always win whether it's in tennis, golf or squash. Many appear to believe that it's different when trading markets. It's not.
You must own an asset if you want the returns from it. Invest in markets as you would private property. Few query why property prices rise over time, but by owning a property you benefit from the rise in value over time. Residential property prices rise over time principally because personal incomes rise in a prospering economy. With higher incomes, people can afford to pay a higher price for the same property, which, in bigger cities, can often be supply constrained adding to the upwards pressure on prices.
Avoid savings products that provide a guarantee, as they are full of hidden costs.
In my view, global equity markets are currently priced to deliver annual returns of circa 5-6% on a 5-10 year view. Looking for a guarantee will significantly eat into those returns to pay the manufacturer and distributor of the product (the banks mainly).
Great products for the sellers, but lousy, mostly, for the buyers! If you can't take the volatility that markets often throw at you, then don't invest in markets and be content with the lower returns that bank deposits have traditionally provided.
Avoid using debt where possible in investing. It adds risk and mostly there's no need. In Ireland, for those who prefer property, there is now three good quality REITs (Real Estate Investment Trusts) listed on the Irish stock exchange. These listed funds give you diversified exposure to office, retail, industrial and residential property and, like any company, REITs can borrow modestly to enhance the natural underlying returns.
The proposition of buying good quality property assets bit by bit overtime in the stock markets should be more attractive to many savers starting out than having to buy a single physical property at a point in time, and often using debt.
Take the time to learn about investing. Understand why business in general is always likely to generate higher returns than can be obtained from bank deposits. This is a basic investment fundamental. Those higher returns can be yours if you are a part owner of businesses or property listed on stock markets or through fund structures like life company unit-linked funds, investment funds available on investment platforms or funds already listed on the stock markets which include exchange-traded funds (ETFs) and investment trusts.
For the young and those saving through a pension, who can invest regularly, in up markets and down markets, the risks of mistiming your entry and getting poor value are hugely mitigated as you are investing over time.
Forget about the political and economic news flow of the day. Recognise that you don't know what's priced into markets at any point in time, and you can't see the future. Nor can anyone else for that matter. Have a glass-half-full attitude, as it has always paid to do so. Living standards today are probably some four to five times higher than for the average person in Ireland even one generation ago.
Of course there are risks, learn to mitigate them. Good investing is boring. Your job is to get the higher returns on offer from businesses and property over time, not to sit in front of a screen, tablet or mobile phone looking at gyrating share prices and for instant answers.
And finally, start saving, at least 10% of your income before you even consider buying a house to live in. If you can't save 10% before all else, then you are in danger of always having to work for money. Build an asset base from which you can earn an income and you will achieve financial freedom earlier in life than you might have thought. You can't eat the house you live in, so your home is not an asset. It's a lifestyle!
Rory Gillen, founder of GillenMarkets, which provides investment training, an investment newsletter and website for DIY investors as well as wealth management services.