Profitable stock market investment is one of the simplest of all financial activities and yet an entire industry has been spawned which cons the public into imagining the process is very complex. You might take a look at Harriman’s New Book of Investing Rules – one chapter in particular encapsulates and reflects my own views.
- The first recommendation is not to invest a big lump sum but to drip money in over time. A regular savings plan of £x a month put into stock markets will build up over time into a large nest egg but will not give you nightmares. Fear and greed are your worst enemies. Most investors invest at the top through greed and exit in panic at the bottom.
- The second tip is to diversify widely over international stock markets throughout the world. Currency is a diversification as well as a “risk” and you should not hedge the diversification away. Do not invest in £ only and the UK stock market if you are British or the $ and the S&P 500 if you are from the US. You never know which economies will be the next star or the next dog so don’t bother trying to guess. Prediction is impossible for random chaotic systems like stock markets and economies.
- Next, invest only in cheap stock index tracking funds. Over the long term picking stocks is a an expensive waste of time and money and you have no need to pay the salaries of analysts and fund managers.
- Then, diversify your investment providers: don’t just use one index fund provider or one stock broker. The biggest and best can and do go bust and government protection may or may not bail you out. Better to rely on diversification than government safety nets.
- iShares MSCI World UCITS ETF for instance gives vast diversification. It currently holds 1,623 investments (so very little stock specific risk) spread over many world stock markets. It is weighted by size of market so it currently holds almost 60% in the US. If you want greater exposure to you home country and currency then simply pick (in addition) a cheap index tracker following your domestic stock market: for instance a UK investor might look at the Vanguard FTSE 250 UCITS ETF.
- The exchange traded fund market is currently dominated by large providers who control most of the market: BlackRock, Vanguard, State Street and Invesco are among the biggest. So don’t just invest with one – spread your risk.
- Stock indices are NOT passive. They are ACTIVE investments. As companies grow in size and their price increases they are added to a given index; when they crash and burn (as all companies do in time) they are removed from the index. Therefore a tracker automatically has you in the bigger and more successful stocks and has you out of the losers. Over time.
- The big caveat is: will stock markets continue to increase in price. They have achieved roughly 8% compound annual growth over the past 100 years (dividends re-invested) but their continued profitability depends on whether we humans continue to grow and invent and prosper. And that is as much for you to guess as I.
I m NOT giving investment advice – go and see your investment advisor but be careful he does not load you with expensive rubbish which pays him big fees. Investment advisors are often fools or knaves but you may be lucky enough to come across an honest and well meaning stockbroker who also has the intelligence to guide you in the ways of righteousness.