By Julie
Introduction to Investing
Are you interested in investing, but unsure where to start? Dennis Harhalakis, Founder of Cambridge Money Coaching, outlines a simple approach to investing in the stock market, to build wealth over time. He also explains how you can know who to trust, and how to spot potential scams.
Photo by Dylan Calluy on Unsplash
What is investing?
Investing is the process of buying assets (e.g. company stocks, property, art etc.) that you believe will increase in value over time, and therefore provide returns in the form of income payments or capital gains (profit). Some assets such as bonds pay income only.
However, it is important to note that investing involves risk, as the value of an investment can go down as well as up. It is recommended that you always get advice from a trusted source.
For someone new to investing, what would be a sensible approach?
“I’m not able to give you anything that approaches regulated advice. In terms of what I suggest as a good approach is that on average, stock markets return about 7.5% per annum. So, if you want to invest to build wealth, unless you want to actively engage in investing, the most sensible solution is to put in a little bit of money over a very long period of time.
“I’ll give you some numbers to show what I mean: If you invest £100 a month into a ‘stocks and shares ISA’, so you don’t pay any tax on that, and you do that for 40 years (=£1200 a year), based on historical returns, at the end of that 40 year period, you’ll have somewhere between £285,000 -£300,000, or possibly more depending on the stock market performance. So that’s with £100/month, which doesn’t sound unachievable for many people. And it doesn’t need to be any more complex than that.
“Stock markets go up and down. Most people worry about losing money. We’d like the value to go up forever, but that’s not how these things work. But the way to look at it is, if you’re putting in money every month, if the stock market drops, then you’ll be buying things a little cheaper the next month. Essentially, you’re looking at a process over 30-40 years, so what happens on a month-by-month basis, isn’t really relevant to you. If the stock market drops a bit, your £100 will buy a bit more; if it drops further, you buy a bit more the next month, and eventually it goes back up again. In general, most stock markets go up for 9 months of each year, and fall for 3 months of each year; that’s really just a factor of the way these things move.
“So, that would be my approach to making it as simple and stress-free as possible – put a little bit of money away each month if you can afford it. If you can’t because you’ve got other expenses, then stop for a few months or years and restart when you can.
“One thing that’s important to note is that the earlier you start, the better. So, if you can put some money in when you’re young in your twenties and just leave it alone, it will compound and grow over time. By the time you’re in your thirties and perhaps have family, a mortgage and other expenses, your ability to save will be reduced. So try and put money in early on and keep going for the long term.”
When you talk about ‘investing in the stock market’, what exactly do you mean?
“What I mean by investing in the stock market, is invest in the whole stock market as opposed to individual stocks and shares. In the UK, the most popular stock market we follow is the FTSE100 – that’s the 100 biggest stocks in the UK.
“I could buy an individual stock such as Tesla, Shell, or Unilever, but individual stocks fluctuate quite a lot; an individual stock can lose 100% of its value, companies go bankrupt all the time. So, if you’re looking to build wealth over time, you don’t need to pick the hot stock of the moment. What you’re looking to do is to buy into long-term growth. And the way to achieve that is to buy into something that tracks the whole FTSE100 index. You can think of it as buying a little bit of every single one of those 100 stocks, or that you’re buying the index. Essentially, it means that, as long as the index is going up, you’re going to keep making money, and you don’t need to worry about any individual stock within it losing money or going bust.
“What’s interesting about this process is that generally, the index growth is dependent on a small handful of stocks – maybe there will be five stocks that perform really well in any particular year. But, if you haven’t invested in those, or you have put money into stocks that crash out of the index that year, then you could struggle. So, if you buy the index, you will have all the stocks that do really well. And the ones that don’t perform well, get removed from the index every 3-6 months and replaced. It’s the easiest way to make sure you’re buying into the long-term growth of the index.
“You don’t necessarily have to pick the UK FTSE100, you could choose any index, for example the US market, or a global index that tracks global stock markets. And that way you don’t even have to pick the right country – as long as stock markets go up globally, you’re going to be making money.
“Finally, I’m not saying don’t invest in things that are volatile – for example, I’m not anti-cryptocurrency. What I am saying is, if you want to invest in single stocks, crypto, or volatile asset classes, make sure you only do it with a small part of your money. Don’t invest all your money in something that can lose 50% in a week. Crypto can do that, and so can volatile stocks. They might go up, and they might go down. And that’s OK, I’m not against that at all in principle. If you want to invest in crypto or stocks like Tesla because you love their story, then go for it. Just don’t borrow money to fund that, and don’t put all your money into it. Remember that the safest and simplest way to build wealth is by investing over a long period of time. Stock picking may sound like fun, but even most professional fund managers fail to beat the index over time.”
There’s no shortage of information out there about money and investing. How do we know what resources we can trust and what is a scam?
“That’s a really good question. One way to look at this is to understand the business model of the organisation that’s providing the information. If you’re looking for conflict-free, unbiased advice, The Money & Pensions Service and Martin Lewis’s MoneySavingExpert are good resources. They are not sponsored by anyone, they are not driven by anything other than trying to provide the right information to individuals. You can also try Money to the Masses, Which or Boring Money.
“If you’re looking at scams, and there are plenty out there, try doing a little bit of research and understand the concept of the base rate. It means what you could reasonably expect for an investment, what makes sense? If interest rates were say 4%, then 4% is your base rate. If you put your money in a bank’s deposit account, you’d get 4% and you’d know that would be a safe investment. So, if anyone is offering you 8% or 15%, telling you it’s absolutely guaranteed so don’t worry about it, they are lying to you and it’s probably a scam.
“If we apply this same concept to investments, the base rate for the stock market is historically about 7.5% pa: the return you can expect to get if you invest in the stock market is 7.5 – 8% per year. What that tells you is that if someone is offering you 20-30% return, they are lying and that is likely to be a scam. High returns always mean high risk. But high risk doesn’t mean high returns.
“Another way to spot a scam is if someone is offering something that sounds too good to be true –then it probably is. If someone calls purporting to be from Carphone Warehouse offering you the latest iPhone half price, with unlimited data, calls and texts (as happened to me recently), then it’s a scam.
“Scammers in general work on the twin principles of persuasion of fear and greed: they make you really fearful that you’re going to miss out, or that you’re in trouble, or that you need to move your money somewhere safe. Or they offer something that appears to be so good, you’d be a fool not to take it. Another one is false scarcity. If you go on some websites, they will tell you how many people are looking at the item, how many have been sold in the last three minutes. They try to create the fear that if you don’t get it now, you’ll miss out completely. But if you can take a step back and think this feels like high pressure, it usually is.
“Your understanding of the base rate will allow you to judge whether or not what you are being offered really does make sense.
The concept of base rate stems from what the historical return of an investment looks like over time. So, you can check out the relevant parts of the stock market. For example, you may find that technology stocks have risen, on average, 15% – 20% over time – there’s a different base rate for different types of investment. Some will have higher growth rates, but they can also drop quite significantly.
“To sum up, don’t get triggered by fear or greed, or false scarcity or any other manipulation a person is trying to exercise over you. Understand the concept of social proof (where people copy the actions of others, to try and fit in and display accepted behaviour). Generally, be aware of the various types of persuasion that people use to get you to buy stuff. Do some research, so you understand what the base rate is for that particular investment. Then consider, does that make sense for me?”
Disclaimer: Content is for information only & does not constitute financial or investment advice.
Find out more about investing
5 easy and empowering steps to make your first investment
Some excellent tips for beginner investors, from Graham Wells, financial coach & founder of GroWiser
About Dennis Harhalakis
Dennis founded Cambridge Money Coaching to help transform the way people think about money. He helps them tackle financial issues to reduce their anxiety and enable them to make better decisions for themselves.
To find out more or to contact Dennis about money coaching:
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