How to invest in the stock market | Our 6 Top Tips

How to invest in the stock market

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    Investing in the stock market can be a lucrative way to build long-term wealth, but it can also be a minefield. So how can you mitigate the risks and avoid the pitfalls?

    To improve your chances of success in the stock market, it’s important to define your goals, consider your risk tolerance, do your research and stick to your plan. It is less risky to build a diversified investment portfolio instead of putting all of your money in one stock.

    If you want to start investing in stocks, you need a robust strategy. We’ve put together this useful blog post to help you devise your stock market investment plan for the best chance of success.

    For more personalised advice on stock investing, please get in touch with Heritage Financial Planning.

    We help many individuals in the UK to start investing in stocks with independent and impartial advice. To arrange a consultation with one of our highly-qualified team, please do not hesitate to contact us.

    Heritage’s top 6 tips on how to invest in the stock market:

    1. Define your goals: You need to determine what it is you actually want to achieve from investing. Are you investing for retirement? To save up a deposit for a house? To help pay for your children’s university fees? Establishing your goals will help you decide how much risk you can take on.
    2. Decide your risk tolerance: Every person has a different level of risk tolerance, i.e. the amount of risk they are willing to take on with their investments. Before investing, assess your own risk tolerance by considering your time horizon, income, debt, and your investment goals. This will help you choose appropriate investments or asset classes.
    3. Diversify your investments: The phrase, “Don’t put all your eggs in one basket”, is very relevant in the stock investment world. It’s not advisable to put all your money in one stock or one sector, or even one country. Instead, spread your investments across different stocks, sectors, asset classes and geographical areas. This will help reduce your risk.
    4. Do your research: Before you start investing, make sure you understand the different asset classes and how they react to different market conditions. Consider this blog article part of your research! We will cover the different asset classes later in this article.
    5. Stay disciplined: The stock market can be volatile, with lots of ups and downs, but it is important that you stick to your investment plan. A well-set-up plan, where your goals and risk tolerance have been established appropriately, will allow you to weather market downturns with minimal stress.
    6. Consult a professional: It’s wise to consult a financial advisor like Heritage Financial Planning, who can provide valuable advice and expertise in setting up your investment plan.

    With those points in mind, let’s dive into the detail of what stock market investing entails, why you should consider it, and how you can learn from past evidence.

    What is a ‘stock’?

    When we discuss ‘investing in stocks’ or ‘buying equities’, this usually refers to buying and selling shares of a company that trades on a public stock market. 

    Investing in stocks and the stock market can conjure up images of gambling and scenes from a trading floor or the Wolf of Wall Street.    

    We like to think of investing as a much more sedate activity. As Warren Buffet said, we like to think of shares

    ‘…not as a mere piece of paper. They represent part ownership of a business’. 

    When you own the shares of a business, this confers the right to benefit from the performance of the business – such as dividends or if the business is bought for a higher price.  

    What is a stock market index?

    Many countries, particularly developed countries, will have their own stock market, which is usually made up of some of the biggest companies in the country. These can often be known as the stock market index.   

    The UK stock market is commonly known as the FTSE 100, which is the biggest 100  companies registered in the UK by market capitalisation. 

    Why invest in the stock market?

    The stock market and stocks are one of the few asset classes that have consistently increased in value above inflation over time. 

    As such, they have the potential to achieve capital growth and grow your wealth over the long term. 

    With people living longer than ever and Defined Benefit ‘final salary’ pensions closing, the responsibility for planning for retirement has shifted to the individual. To learn more about investing with pensions, read our information guide about retirement planning.

    S&P 500 growth since 1992

    The US stock market, known as the S&P 500, has grown by over 10% a year since 1992. A £10,000 investment at that time would have grown to over £198,000!   

    Why do stock markets go up?

    By investing in shares, you are purchasing an ownership stake in a company. This is a bet on innovation, capitalism and technology. It is hoped that businesses, over time, will continue to earn more money, which investors will benefit from.

    This is a side of the trade I would bet on and has served investors well over the years.

    S&P 500 earnings per share since 1988

    What are the different asset classes available to invest in?

    There are several asset classes that you can invest in. Your goals and tolerance to risk should determine the weightings of each asset class within an investment portfolio. This can also add diversification to a portfolio which in turn lowers non-systematic risk.

    Here are 6 of the most common asset classes:

    1. Stocks: Stocks or equities represent ownership or a “share” in a company. Investors can buy individual stocks or invest in a diversified portfolio of stocks through mutual funds or exchange-traded funds (ETFs).
    2. Bonds: Bonds are debt securities issued by companies, banks, or governments and provide a fixed income stream to investors. Bonds are typically less risky than stocks but also offer lower potential returns.
    3. Real Estate: Property can either be a direct investment, i.e. buying and renting out single properties, or a collective investment, i.e. buying shares in real estate funds or buying shares in real estate investment trusts (REITs). Real estate investments can provide a return to investors through rental income or capital appreciation of property value.
    4. Commodities: Commodities are physical goods such as gold, oil, and crops that can be bought and sold on exchanges. Commodities can offer diversification and can potentially provide protection against inflation.
    5. Alternative investments: This includes hedge funds, private equity, and venture capital. These investments are typically available to accredited investors or very high net-worth individuals and offer higher potential returns – but also carry higher risks and higher fees.
    6. Cash and cash equivalents: Cash and cash equivalents include savings accounts, money market accounts, and short-term bonds. These investments offer low risk but also provide lower returns and may lose real value over time due to inflation.

    Investors often create a diversified portfolio by investing in a mix of these asset classes to balance risk and return. The allocation of assets depends on the investor’s goals, tolerance of risk, and time horizon.

    How do different asset classes affect the volatility of an investment portfolio?

    Each asset class has a different effect on the volatility of a portfolio, depending on its risk and return characteristics. Here are some ways in which different asset classes can affect a portfolio’s volatility:

    1. Stocks: Stocks are typically more volatile than bonds or cash because they are subject to greater market fluctuations. Therefore, a portfolio with a higher allocation to stocks may experience more volatility than a portfolio with a lower allocation.
    2. Bonds: Bonds are typically less volatile than stocks and can help reduce overall portfolio volatility. Bonds can act as a hedge against stock market volatility, as they tend to perform well when stocks are declining. However, they can be subject to interest rate risk and can experience volatility when interest rates change quickly.
    3. Real estate: Property investments can be more volatile than bonds but tend to be less volatile than stocks. The value of real estate investments can fluctuate with changes in interest rates, economic conditions, and supply and demand in the property market. Real estate is also more illiquid than stocks and bonds, which can add to its volatility.
    4. Commodities: Commodities can be more volatile than stocks or bonds because their prices can be influenced by a range of factors, such as global supply and demand, geopolitical events, and weather conditions.
    5. Alternative investments: Hedge funds, private equity, and venture capital can have high volatility due to their high-risk, high-reward nature. The managers running these types of investments also typically use leverage which can exponentially increase either the returns or the losses and therefore increase volatility. These investments are typically less liquid than traditional investments, which can also add to their volatility.
    6. Cash and cash equivalents: Cash and cash equivalents are generally considered low-risk, low-return investments and can help reduce portfolio volatility. Holding cash can provide a buffer against market downturns, as investors can use it to take advantage of buying opportunities when asset prices decline.

    Overall, the allocation of different asset classes in a portfolio can have a significant impact on its volatility. A well-diversified portfolio that includes a mix of asset classes can help reduce volatility and provide a more stable return over time.

    Investing through an investment platform

    An investment platform or ‘wrap’ is a single place which allows you to buy or sell shares or investment funds. Some of the better know, and biggest platforms include Hargreaves Lansdowne and AJ Bell.  

    They are online and allow you to select your own investments, with thousands of companies and funds to choose from and invest in. If you select an ‘execution only’ platform, this means you select your own investments without advice and are ultimately responsible for your own investment decisions.

    It is possible to hold several tax-advantaged wrappers on a platform, such as a Self Invested Personal Pension and Stocks and Shares ISA. 

    How much does an investment platform cost?

    The administration fees charged will vary from platform to platform, and the charges can often be either a tiered percentage of your assets or a flat fee.

    Some platforms cater specifically for larger portfolios, and others will be more accommodating to investors with small portfolios or who are new to stock investing.

    Platforms may also charge a fee per trade or for certain investments, so it is important to bear this in mind when selecting a platform. 

    What happens if an investment platform fails?

    When you invest via an investment platform, your investments are placed into a separate, ring-fenced account that is held with a custodian or nominee, who will typically be a large institution or bank.

    As your funds will be segregated from the platform provider, if it goes bankrupt, your assets will be separate from theirs, and the creditors cannot come after you.

    Platforms are regulated by both the Financial Conduct Authority and Prudential Regulation Authority, so they must adhere to strict capital adequacy rules, which means they must hold enough capital in reserve to cover ongoing events in the event of a windup.  

    Investing in individual shares

    If you believe in a specific company or a handful of particular stocks, it is possible to invest in an individual company or a handful of them. 

    However, you should be aware that stock picking is difficult. According to S&P Dow Jones Indices, only 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020.

    Over this period, the index as a whole rose 322% while the median stock rose just 63%. 

    One of the biggest drawbacks of investing directly in single shares is the lack of diversification. If you are only invested in a couple of shares, if their performance suffers and the stock price falls, this can seriously harm your portfolio. 

    If you are going to invest directly in individual companies, then it is thought a portfolio of at least 20-30 names should provide diversification. 

    Advantages of investing in individual shares

    • The potential to pick a winner, such as the next Amazon.
    • It is possible to avoid investing in certain companies or sectors you wish to avoid for moral or ethical reasons, such as tobacco or defence stocks.
    • It can be fun and interesting (although we would argue investing should be boring and business-like!).

    Disadvantages of investing in individual shares

    • The lack of diversification. By concentrating your investments in only a few individual shares, you have the potential to ‘lose your shirt’ if one of them performs poorly.
    • Stock picking is difficult, as demonstrated above, and even active professional managers, on average, fail to beat their benchmarks.
    • Some brokers will charge as much as £10 or more to trade. This can be uneconomical for smaller portfolios.   

    Due to the lack of diversification with investing in individual shares and the difficulty in selecting winning stocks, we would always suggest investing in funds or collective investments.

    Investing in investment ‘funds’

    An investment fund is a ‘collective investment scheme’ that pools the money of various individuals. The pooled investment is managed by an investment manager who invests the money on the investor’s behalf.  They typically charge a management fee to the investor, which is usually a percentage of assets. 

    There are multiple investment funds available, which include:

    • Exchange Traded Funds (ETFs)
    • Unit Trusts
    • Open Ended Investment Company (OEICS)
    • Hedge Funds

    How to choose an investment fund

    Before selecting a fund, you should know its risks, charges, features and objectives of funds as these can vary from fund to fund. For example, some funds will be invested in equities which can be considered a growth strategy, whilst others will invest in fixed income, which can be considered more focused on capital preservation. 

    Advantages of investing in a fund

    • They may be invested in multiple investments or companies which provide diversification benefits.
    • It may be possible to invest in assets that would otherwise be difficult to invest in, such as international stocks and bonds.
    • If you do not have much time to research investments, you can delegate this to a professional.

    Disadvantages of investing in a fund

    Although there are relatively few disadvantages to investing in funds or collective investments, some of them could be:

    • Certain funds may have high charges. You should always check if there are any entry and exit costs. You should also scrutinise the ongoing charges, which are known as the ‘Ongoing Charge Figure (OCF).

    At Heritage, we struggle to see the benefit of a fund that charges in excess of 0.50% per annum. 

    ‘Active’ vs ‘Passive’ Management

    Passive investing and active management are two different investment strategies with varying characteristics. I will outline the differences below:

    1. Investment approach: Passive Management aims to match the returns of a particular market or market index. Active Management is where active managers try to “beat the market” and or certain standard benchmarks.
    2. Investment style: Passive Management is typically a long-term investment strategy with a buy-and-hold approach. Active Management usually involves frequent buying and selling or “trading” of securities in an attempt to “buy low, sell high”.
    3. FeesPassively managed funds typically has lower fees compared to actively managed funds.
    4. Diversification: Passive Management offers broad diversification through index funds and ETFs. Active Management may have a more concentrated portfolio of stocks and shares or a particular sector the fund manager favours to “outperform”.
    5. Risk: Passive Management is generally considered less risky than Active Management, as it eliminates the risk of individual stock selection and market timing, which active managers frequently try to get right.
    6. Performance: Passive Management generally provides similar returns to the market index it is tracking. Active Management either outperforms or underperforms the market, depending on the investment strategy and individual stock selections.

    Ultimately, the choice between passive and active management depends on individual investment goals, risk tolerance, and personal preferences.

    What is active management?

    An active manager can be described as an individual, professional fund manager or team of professionals who seek to make deliberate decisions when buying and selling assets. The goal of the manager is to outperform their chosen benchmarks.

    For example, an active fund manager who invests in large UK companies will try and outperform the FTSE 100 stock index.

    In trying to outperform their benchmark, an active manager may rely on investment analysis,  quantitative data and their own judgement.

    What is passive investing?

    In contrast, passive or ‘index investing’ follows simple rules that try and replicate an index or benchmark.

    Passive managers believe markets are efficient and that active managers cannot outperform their benchmarks over the longer term.

    As they seek to invest in a rule-based fashion and do undertake discretionary decisions, the fees are significantly lower as there will not be an expensive team of analysts to pay. 

    Their argument is that after fees, most active managers fail to beat their benchmarks. By achieving market returns via an index fund, you can actually outperform active managers on an after-fee basis.

    The data would appear to support this school of thought. According to the S&P Indices versus Active (SPIVA) scorecard, for the past 12 consecutive years, the average actively managed large-cap fund underperformed the S&P 500. 

    At Heritage, we consider ourselves to be evidence-based investors, and for this reason, the vast majority of our investments are passive. 

    The importance of diversification and knowing your risk tolerance

    The stock market can be volatile, which means the value of your investments can go up and down considerably. We know the benefits of investing – the potential to achieve returns that outstrip inflation and grow the real value of your capital over time.  

    However, to achieve success in the stock market, you must be able to stomach the volatility and falls that will inevitably occur.

    Although the US stock market has grown by over 10% per year for the past 40 years, since 2000 alone, there have been drawdowns (peak to trough) in excess of 20% four times!

    Drawdowns in US stock market

    If you cannot stomach falls of this nature, then there is no point investing all of your money in the stock market, and you should consider safer asset classes such as cash and fixed income. The trick is to select an asset mix that you will stick with through the good and the bad times. 

    You should also bear in mind the length of time your funds have been invested. All things being equal, if you are 30 years away from retirement, you may be able to afford to take more risks with your investments as you have a longer time horizon.

    On the other hand, if you are approaching retirement with one eye on drawing an income from your investments, it may not be prudent to invest your money in a high-risk strategy.  

    The importance of investing internationally

    Even if you invest all of your money in the stock market, you should look to invest internationally, as it adds diversification to your portfolio.  

    The chart illustrates this well; as you can see in different years, international stocks do better than US stocks in some years, and the reverse is true in others.

    The importance of investing internationally

    How often should I trade?

    There are generally two schools of investors – those who ‘buy and hold’ and those who trade daily or over a number of days.

    Although there is no definition for either camp, at Heritage, we define buy-and-hold investors as having a timeframe of several years and day traders, as the name would suggest, holding stock for a matter of days.

    We are of the opinion that to achieve success in the stock market, you should be invested for as long as possible. Trying to time the market is impossible and can lead to underperformance. For this reason, we consider ourselves to be long-term, buy-and-hold investors.  

    In fact, 78% of the stock market’s best days occur during a bear market. If you had missed the market’s 10 best days over the past 30 years, your returns would be cut in half.

    If you do trade frequently, the evidence suggests you will pay the penalty. For example, look at a study carried out by Brad Barber & Terrance Odean titled Trading is hazardous to your wealth. Of 66,465 households in the US during 1991-1996, those that traded most earned an annual return of 11.4%, while the market returned 17.9%.

    Closer to home, this trend also rings true. According to a Financial Conduct Authority study, they found 82% of spread betting customers (which is synonymous with day trading) lose money.

    The benefits of saving regularly – Pound Cost Averaging

    For younger investors who are saving for retirement, pound cost averaging, which is simply investing on a regular basis, provides some protection as it prevents an investor from investing at the top of the market. 

    If markets do fall in value, investors are protected as they benefit from purchasing investments at lower values which, all things being equal, means higher expected returns. 

    Pound cost averaging can help smooth returns in investment markets by taking advantage of the volatility. 

    As well as smaller regular contributions, it’s also a way of investing a significant lump sum or windfall over several years. 

    FAQs about investing in the stock market

    To learn more about stock market investments, check out our frequently asked questions below or contact us today:

    What is the difference between index funds and exchange-traded funds?

    Index funds and ETFs are passive investment vehicles designed to track the performance of a particular market index. While they share similar characteristics, they differ in their investment structure, trading, cost, accessibility, and liquidity.

    ETFs are traded on an exchange throughout the day, while index funds can only be bought or sold at the end of the trading day. ETFs typically have lower expense ratios (or lower fees) than index funds. The choice between the two depends on individual investment goals, risk tolerance, and personal preferences.

    Do I need a broker or financial advisor to invest in stocks?

    No, you do not necessarily need a broker or financial advisor to invest in stocks or the stock market. It is possible for individual investors to open their own brokerage or online trading accounts and buy stocks online. Many online brokerages offer easy-to-use platforms for investors to manage their portfolios.

    However, it’s important to remember that investing in the stock market can be complex and risky. If you are inexperienced in trading, there is a risk of getting back less money than you originally put in. A financial advisor can provide expert guidance and help you put together a personalised investment based on your goals and objectives in order to mitigate the risk and give you the best chance of success.

    Is an investment account the same as a brokerage account?

    An investment account and a brokerage account are not the same.

    An investment account is a general term that refers to any account that holds investments, such as stocks, bonds, mutual funds, or ETFs. Investment accounts can be held at a variety of financial institutions, such as a bank or an investment firm.

    A brokerage account is a specific type of investment account that allows investors to buy and sell securities, such as stocks, bonds, and mutual funds. Brokerage accounts are held at a brokerage firm, which acts as an intermediary between the investor and the stock market. Brokerage accounts can be used to trade securities online or with the assistance of a stock broker.

    For investment advice, contact Heritage Financial Planning

    The stock market can be an unnerving place if you don’t have the right advice, especially if you are approaching retirement or don’t have much appetite for risk. We hope that you have found this blog informative and helpful in making decisions about the future of your investment portfolio.

    At Heritage, we completely understand the concerns that many people have about investing in stocks and are here to provide impartial advice based on each client’s individual circumstances and goals.

    Our only motivation is to help our clients achieve the best return on their investment. We simply wouldn’t recommend an investment we weren’t prepared to make with our own money.

    To arrange a free initial consultation, please fill in our contact form.

    In Summary

    Investing in stocks can be an exciting way to grow your wealth. However, make sure you undertake a lot of research before making any trades. If you do not feel 100% confident investing by yourself, get in touch with Heritage Financial Planning for sound professional advice.

    When seeking an investment financial advisor in the UK, it is important to choose a reputable company that is regulated by the Financial Conduct Authority (FCA). They should also have the relevant qualifications and experience to provide investment advice.

    By seeking professional financial advice, you can gain a better understanding of the investment options available to you and develop a strategy that aligns with your long-term financial goals.

    Remember that investing in stocks comes with risks, and past performance is not a guarantee of future returns.

    The value of your investments can go down as well as up, so you could get back less than you invested.

    The information contained in within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction

    Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

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