Investing For Beginners: The Complete Guide For 2019

Eager to find out more about getting started with investing in 2019? Today I’m excited to have a guest post that serves as a complete guide to investing for beginners from Jennifer Kempson, aka Mamafurfur.

Jennifer is a 30-something  Scottish working mum with a passion to help others create the work life balance & lifestyle they wish with time & financial freedom, sharing smarter spending, saving and lifestyle strategies.

Outside of her blog, she recently released her first book titled “The Master Money Mindset: How to Master your Money and Create a Powerful Money Mindset” sharing 26 timeless money principles that will allow you to design and shape your future using money as the resource it should be, available on Amazon Kindle and Paperback now.

Without any further ado, let’s hand things over to Jennifer…

My passion is helping others create financial and time freedom in their own life, and I believe it can be achieved on any budget just by following a few simple principles. The freedom to know that you have more than enough resources such as money to design life on your terms and do everything you want to do truly can change your world forever.

One principle that I love to teach others is the power of compound interest and your money, allowing it to work for you, rather than you having to work for money.  We can use the power of compound interest whenever we store our money in Investments or savings accounts allowing it to continue to multiple even when you are sleeping.  I’m here to show you everything you need to know to make informed choices with your money, and why absolutely everyone can and should use the stock market and investments to grow their wealth long term to help achieve their financial goals.

If the most successful people in the world invest, there might just be something in it!

WHAT IS INVESTING?

Often when I say I invest in the stock market, as a normal working mother from Glasgow, I get the same few responses.

It is “too scary”, or “you could lose it all“, or “it’s too complicated and only for wealthy people to understand”.

I promise you after reading this article you will be one step closer to trusting the process of investing that has been followed by the most financial successful people in the world, and continues to be used to give you interest on your bank accounts and pensions.

Essentially when you set up a savings or trading account with an investment company (such as Vanguard) or a Pension through an investment company, you deposit your money so that is then used to purchase individual stocks, funds, bonds or hold the cash for you.

The type of investment you purchase with your deposited money will ultimately then return back further profit (interest) or make a decrease based on the asset you choose to buy with your money.  You can purchase stocks within a range of companies, individual companies or bonds and for that trust with our money they return us back a portion of their profits. 

With any investment, this is NOT a short term quick money scheme and we are not guaranteed to see return right away from investing our money.  It is not similar to a normal bank account as the money is effectively used to buy a part of a company or loan for the length of time you choose to leave it.  

You need to invest your money for the long term in whatever method you choose and ideally 5+yrs to allow for the natural dips and increases to smooth out your growth over time. 

Most people invest and sell using their emotions – they sell when low and purchase when high – we need to detach ourselves as much as possible from any current trend reports and trust that the markets will continue to increase overall as they have for 100+yrs as an average.

WHAT ARE STOCKS, AND HOW CAN YOU PURCHASE THEM? 

On the basis level, a Stock is a piece of a company you own for example you wish to purchase a part of Coke Cola or Exxon Mobil.

When the company is doing well, providing an increase in revenue and margin and more profits to their managing boards, the value of that share to buy it that day will go up making the value of your original share increase and be worth more than you paid for it.  Thus you see an “interest” increase on your stock item if you were to sell it that day. 

The opposite is true too – if the company doesn’t do so well and the stock price decreases, you may hold stocks that are worth less than you paid for them if you were to sell them that day.

Companies are grouped overall by their size and revenue generally, and then by geographical location and the type of product they sell.  

The lowest risk of stock price dropping sits generally with the developed country largest companies who have long history of profits; where as developing country company based in India, or Russia, for example would be seen as riskier stocks with potential greater fluctuations in profits and demand for products. 

When we invest and purchase a stock in a company, we also have the potential to receive a part of their profit share each year or every few months.  This is called a Dividend, and ideally we would reinvest that back into the company again to keep our growth going.

Over a long time, stocks offer the highest potential return on your initial investment due to companies naturally wanting to drive sales and be successful every year. 

WHAT ARE FUNDS?

Stocks can be purchased individually, but it also makes more sense to purchase groups of stocks together. Purchasing stocks in a group and spreading your risk across many companies is the ideal way to reduce risk and reduce potential declines in your investment. When we group stocks together to purchase as a “one set” this is called a Fund.

We can also have passive or active investments depending on the interaction required to maintain our growth in the investment. Passive is where there is no management of the stock; Active is where we have a manager or ourselves maintaining the balance and decision over our growth of our investment. I would strongly advise when you are new to investing to choose Active investments where you can, to make it easier for you in the beginning.

INDEX FUND – PASSIVE INVESTING

An Index fund is then a collection of company stocks that are grouped due to their stature within a region or product.  Usually they will track the top performing list of companies only as one group altogether under one term. For example, the S&P 500 index fund, will track the top performing US companies only at that time and the companies within it can move in and out of the fund at any point. The Fund has its value assigned to it once a day, trading to purchase or sell only happens once based on the day’s stock market performance.

Index funds are ideal for novice investors as they are usually the cheapest in terms of charges, due to no Investment manager required – it automatically tracks the top performing companies for you without anyone having to manually do that each day.

For example, the S&P 500 has returned an average of 9.8% yearly growth for the past 80 years alone – and this includes the years when we had the Great Depression and Market Crash. When we compare this level of average return with a normal UK highstreet savings account of 0.02%, there really is no comparison over the potential to help our long term savings grow exponentially.

9.8% average growth is of course not a constant year on year growth seen each year without fail but rather the lifetime of the fund average, but with that level of growth in US developed countries profits – there should be no need to fear investing for beginners.

MUTUAL FUNDS – ACTIVE INVESTING

A mutual fund is managed by a dedicated Fund manager for you, and usually contains a selection of Index funds, general funds and Bonds grouped under one for you hand picked by the Fund manager using their knowledge and expertise instead of grouped by location or size by default. 

You will pay a slightly higher charge for investing in this fund due to needing someone to actively look for better companies and funds for you, to keep a good level of return on your investment. Your selection of a mutual fund should be based on the selection within it, do your research, but also the length you wish to leave it untouched to grow and your personal needs for the investment back and goals for the wealth such as Financial freedom income generating for example. For example, I use Vanguard (Investment company Platform) Life-strategy 100 for my own investments mainly. This fund is a mutual fund consisting of a range of index funds from around the world, and the S&P 500, made up entirely of 100% stocks and shares in companies. I choose this fund as the return is consistent, my risk level is very tolerant as I have 10+yrs before I plan to use the money from within it for living and withdrawing it (so can overlook any dips that might happen soon) and allows me access to my money within 1-2 days when I choose to sell parts of the fund off. I plan to keep this fund and invest further into it until I retire and then move down to more of a 80% or 60% stock mix with bonds once I hit my financial freedom exact number in savings, and then the money will increase at a slower rate but less fluctuation likely year on year.

As always, before you invest in any index or mutual fund, research the available data sheets on what funds are contained within your planned purchase to ensure you are happy with the risk potential and blend of funds selected.

WHAT ARE BONDS?

Bonds are like loan between a company or country and represents a debt with fixed number of years to repay at a fixed interest rate.  When you sell a bond, you promise to repay the buyer when they wish their money back.  If the interest rates go down after you buy a bond, the bond value goes up and vice versa.

Typically in the UK for example, you can purchase Premium Bonds as a consumer which guarantee you the same cash value when you cash them in (for example you purchase £50 of bonds and then in 10 years when you cash it in you get £50 back).

Bonds offer little or no return on your investment usually as the value of the cash will no doubt have risen during the time you kept the bond without cashing out.

For example, £50 might have got you a full month’s shopping back in the 1980s but currently it will only get you potentially one week’s shopping now in comparison.  Usually “interest” from a bond is in the way of a lottery, where each bond you hold could potentially win you a small amount of money if picked each month.  The longer you hold the bond, the longer the risk of your bond being worth less than you paid for it in relative buying power post sale.

CASH – AND WHY IT’S NOT AN INVESTMENT

By default we believe that having cash in a normal savings account might be seen as the safest option, but it is not the best use of your money. On average you might receive 0.02-0.05% return each year on your investment, which will not keep up with the cost of living increase of around 2% inflation each year. That effectively means your money is losing buying power each year you leave it there untouched.

Personally, outside of having emergency fund money in an easy access account, we need to look at using our money to make more money to really define our financial security independent of anyone else. Investing for beginners doesn’t have to be complicated or inaccessible.

HOW CAN WE MAXIMISE OUR PROFITS FROM INVESTING?

Modern Portfolio Theory is the practice of spreading the risk and reward of any investment, and spreading investment over a range of companies to limit any potential losses and called Diversification.

Ideally we want to buy our stocks low and sell when they are high; and the whole stock market globally will go up when we balance this efficiency balance of our choices.

That means making sure we don’t “have all our eggs in one basket” and analyse our choices regularly, or allow someone else to do it for you using a Mutual fund.

Ideally we would want only 5% of our total investments in individual companies, if you wish to choose that route, and 1% in Cash.

This would allow our portfolio’s to remain balanced using the overall market for our growth rather than one company and the risk nature of that.

AS SIMPLE AS OPENING A BANK ACCOUNT…

Now we have covered the basics, it really is time to put them into action and apply them.

Personally, in the UK, I think there is no easier or simpler way to invest than through an Investment ISA (Individual Savings Account) which allows up to £20k per person to be saved tax free.  It is a special form of savings account offered by many banks and investment companies (such as Vanguard) that allows you to purchase stocks and shares with your money, and use the power of compound interest to see it grow dramatically. For example, if you were to invest in an Investment ISA from age 18 to 30 years consistently £200 a month, seeing a 4% average year on year growth, you could see roughly £38k in your savings at the end of those 12 years.  

Keep saving at the same rate until the age of 55 when you can retire, and you could have over £200k to your name with that small saving every month consistently.  

I am a huge fan of holding an Investment ISA account in your name and contributing to it regularly as well as any pension through your workplace.  The benefit of an ISA is that your savings and interest received is tax free up to £20k but also you have access to it at any time, as long as you sell your shares and are able to wait the few days for that to happen.  Your Pension however is locked down until the age of 55 years minimum and there’s no way to gain access outside of this until the time.

Using an Investment ISA, once you are confident with the terms and the funds or stocks you wish to buy based on your risk threshold and tolerance, you can even use this type of high interest return to provide a passive income in future years where the investment will return back to you enough money every year to live off indefinitely.  That truly is when financial and time freedom comes into your own hands, particularly when we will be unsure whether such benefits as State pensions will be an option to support our living expenses when our time comes.

INVEST IN YOUR FUTURE AS MUCH AS YOU CAN

The common myth that investing is only for the select few just isn’t true.  Anyone truly can use the Stock market to dramatically increase their future savings and wealth once the basics are mastered. Especially with such online platforms as banks and investment companies making it easier than ever to open up Investment ISA accounts to use the stock market, there really is no better time to commit to a regular savings habit that will allow you to create income for your future in a straight forward way.

Note from Ruth: Jennifer has a wonderful knack for simplifying the often confusing world of investments, and showing ‘normal people’ just like you and me how to get started and how to really make the most of our money. For more advice and inspiration, be sure to check out her YouTube channel.