A Beginners Guide to Buying Shares: Starting a Portfolio When Markets Are Volatile
Anyone who made a start to an investment portfolio over the last couple of years, with the exception of the past couple of weeks, will most likely have been under the impression that this shares and fund picking game is actually quite easy. Until last week’s downturn, equities markets had been on an inexorable upwards path since the beginning of 2016. Volatility has also been conspicuous by its absence and the number of days and weeks that closed lower than they opened hit record lows. It has been pretty hard not to make money.
However, all good things must come to an end over the first week of February we saw our first major correction in some time as the London Stock Exchange and S&P 500 on Wall Street both slumped by around 9%. While a degree of calm and recovery has since returned to the markets, analysts believe that 2018 is set to be far more volatile than recent years and equities are still considered expensive.
Does that mean anyone who had been considering starting their investment portfolio should hold fire for now? Not necessarily, at least as long as you have a long term outlook of over 5 years. However, an environment of increased volatility does mean that a more careful strategy is required. So what would a beginners guide to buying shares and funds in a volatile, pricey market look like?
After a long running equities bull market, there is a high chance the next few years won’t smile as kindly on the wider equities market. As such, if starting a new investment portfolio, a time line of at least 5 years and preferably 10 should be kept in mind. Now is probably not the best moment to invest in shares if the target is savings that will be accessed, or may need to be, over the next few years. As a general rule, the closer to the point that investments will be converted back into cash, the less risk they should be exposed to. The risk level around equities, even low risk categories, is currently comparatively high.
Funds are a Beginner’s Friend
As a complete beginner, picking individual shares is a risky business. The best approach is to opt for funds which will provide diversity and spread risk. As you gain more experience you can start to consider potentially setting aside a part of your portfolio for individual stock picks. You could start with one multi-asset fund or a few different fund picks with different geographical exposures. Make sure you research fees as often funds of a very similar composition have significantly different fee levels and high fees can eat significantly into returns.
Another option is a robo-advisory service that will put together a funds portfolio to match your investor profile at a reasonably low cost.
Easy Does It
It is especially important to drip feed an investment portfolio when volatility is higher. Even if you are lucky enough to have a significant cash sum to invest, for example the whole £20,000 ISA allowance, it is wiser to split that up into monthly instalments. This spreads risk as if the market falls you’ll get more for your money after the drop. Of course, if markets only go up you’ll lose out with this approach but longer term, hedging risk pays off when it comes to investments.
When equities markets fall, all shares tend to see their prices dragged down even if nothing has changed for particular companies. With volatility expected this year it makes sense to leave cash aside to pick up cheaper investments if markets drop. Even if they drop some more after that, eventually, when the cycle comes around, you should bank that discount.
Don’t Panic if Markets Slump
This brings us back to the first point on time horizon. There’s a reasonable probability that this year, and at different moments in coming years, markets will hit a rough patch and your portfolio will lose value. Don’t panic and if anything use those moments to buy as much as possible. Markets are cyclical and as long as your time horizon is several years into the future, your portfolio will almost certainly turn its fortunes around and make any shorter term losses back up before also adding further gains.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.