I’ve spent many years investing in shares, and I’ve learnt many lessons along the way. It has been a lucrative journey overall but if I were to start with my first investment again, I’d do things a little differently.
Investing in shares for beginners
Firstly, I’d try to think in five-year blocks of time, or more. Investing in shares for shorter time frames is possible but it’s much harder and riskier, in my opinion. Share prices can often be volatile. If I plan to invest for longer than five years, it should allow more time for my shares to grow. If the business does well and manages to grow its earnings, it can lead to higher share prices over time. A word of warning, though. There are many other factors that affect share prices like the number of shares in issue, expected future earnings, or the overall economic cycle.
Next, I’d plan to automate and invest a fixed amount every month. There are two main reasons for doing so. The main reason is that it could minimise downside risk. If share prices move lower, my automatic monthly investment would be buying shares at these lower prices. This is known as pound-cost-averaging. Another reason is that it’s difficult to time the market. There is an old investment phrase along the lines of, “time in the market beats timing the market”. I’d say that’s pretty accurate, especially if I’m investing alongside my day job.
Boosting returns with dividends
If my shares distribute dividends, I’d reinvest this share of the profit to buy more shares. By doing so, I’d own more shares that distribute dividends and the cycle can continue over time. This is known as compounding returns and its power shouldn’t be underestimated. Let me explain with an example. Over the past five years, the FTSE 100 returned just 1% per year. But by reinvesting its dividends, its total return was 5% per year. Over time, the difference in returns can make a meaningful impact on the total pot. In this example, after five years, I’d have gained an astonishing 21% more by reinvesting the dividends.
What to invest in
Next, I’d need to pick some investments. There are thousands of potential options including managed funds, index funds, shares, bonds, and many more. I’m more interested in investing in shares (also known as equities), so that’s where my focus would be.
If I wanted exposure to the US equity market, I could invest in a diversified fund like the Vanguard S&P 500 ETF. This is an exchange-traded fund that attempts to replicate the performance of the S&P 500 index.
Alternatively, I could try to be more selective and pick and choose individual shares that I think will grow over time. For instance, right now in times of soaring inflation I’d be keen on buying shares in BP, Vodafone, and Centrica. Not only do I think they could offer some protection against rising prices, but they also provide a juicy 5% dividend yield.
Lastly, I’d use resources including The Motley Fool to learn more about a variety of companies and what drives their performance. I’d also learn more about the risks of stock market investing and the various pitfalls to look out for. Overall, with a bit of knowledge, I find investing in shares to be both lucrative and enjoyable.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
