By Frank Conway
First off, before you commit any time to this piece, it is written primarily for those that are novices to investing. So, recent graduates and those starting a new job. But, if you want a simple investments brush-up, feel free to read on!
With inflation surging, interest rates about to take off and cryptocurrency valuations crashing to earth, many seasoned investors are finding the current environment more than intimidating.
Clearly, this is a time for serious consideration before committing any of your hard-earned cash to any investments.
Put what is important into perspective
The rapid decline in stock markets since the start of the year has caused hardship for many and demonstrates how easy it can be to lose hard-earned money. Even where funds are broadly diversified (I will discuss this a little later), values have fallen here too!
That said, this is a time to move ahead and take some investment risks. But first, it is also important you put your financial house in order so that you are well positioned to weather risks that emerge.
- Pay your bills first, and save for emergencies, before putting any money at risk.
- If you are working for an employer that offers you an opportunity to sign up to a company pension plan, grab it! It will be the best investment you will ever make!
- Buy stocks —using low-cost, diversified index funds that track the entire market.
First, pay your bills, and set aside some savings
Any form of investing involves taking a risk with your money. The risk of course is that you could lose it. It is possible to reduce the risk substantially even if it never goes away entirely.
So before taking on any risk with your money, it is important to take care of the essentials and pay your bills on time.
Next, make sure you save some cash for emergencies. If this is a bit of a challenge for you, why not look to save €5 per day until you get to €500 and then, increase your savings goal to €1,000.
Why stock markets decline
Stock market valuations reflect a wide number of factors. From the actual success of a company to expectations of sector prospects in the coming months (and years), investors are constantly on the lookout for threats and opportunities. So, if investors feel a company may fare well in the future, they may be more willing to buy shares in that company. Today, as interest rates increase, this will have an impact on families to spend money and this in turn will impact the companies that sell them various products and services. With so much uncertainty, and after a really long period where stock markets went only one way, up, the declines in recent months are not all that unexpected.
Where to put some money
For short-term savings, a bank account makes sense. This is because the money is secure and protected under the deposit guarantee scheme. You can find all the most up-to-date rates online or on the website of the Competition & Consumer Protection Commission. Rates are still close to zero (or fractionally above it) so don’t expect to be earning anything to write home about.
When you do invest, buy stocks, and avoid cryptocurrencies
A golden rule when it comes to investing is diversification.
This is where you look to spread your risk as widely as possible. In Ireland today, there are a growing number of options to achieve this.
The simplest option is to choose an investment fund. This is where you may be invested in 100 different companies or more. In many cases, you could be invested in many of the leading world brands including Microsoft, Apple, Alphabet (Google)!
It is also possible to invest in bonds. While low risk, they are generally not known for high yields, but bond returns have been rising in recent months due to variety of factors, including interest rates.
As a novice investor, putting money directly into cryptocurrencies, NFT’s, gold, wheat and other commodities are the highest form of risk…and this is the risk of losing your money. You must ask yourself if you could afford this?
Plus, if you invest in broadest way in the stock market through index tracker funds, you will be exposed to these things anyway because you will own pieces of the companies that engage, trade, or service them. That includes PayPal and Venmo. The is both the process and point of diversification, you need to spread and minimise your risk of losing your hard-earned money.
Investing is all very well and fine if you have an infinite amount of time to recover from any losses. Therefore, investing timeframes must be factored into your plans. Here, you need to plan over 3-5 years if you are invested in lots of company shares. As we have learned since the start of this year, investment values can fall, a lot!
However, if you have spread your risk across lots of different shares and bonds, or done this via a managed fund, time should generally see most values recover if the fundamentals of the original investment are good. For example, stock markets can drop by 10%, 20%, 30% or more. We know this from history. But we also know that over time, stock markets do recover and over the long term, well diversified investments should do fine.
If you work for an employer that offers a retirement savings plan, take it!
One last point. If you work for an employer that offers an opportunity to participate in a retirement savings plan, you should seriously consider participation. The benefits are huge. In addition to many employers offering to pay into the plan, you also get generous tax relief from Revenue. Plus, any investment growth is tax-free too! So, it’s an excellent way of investing where your employer and Revenue are giving you so much financial incentive to do so.
Frank Conway is Founder of MoneyWhizz