PRUDENT INVESTOR: 10 golden rules for rookie investors

10 golden rules for rookie investors: The PRUDENT INVESTOR has seen it all over three decades of stock market ups and downs… here’s his top tips

  • UK shares have halved twice since turn of the century – but each time recovered 
  • Most investors hold too much money in the UK and too little in the United States 
  • Take risk when you are young as there is longer to recover from catastrophes 

My first foray into the stock market was aged 25 in 1984 when cut-price BT shares were sold to small investors.

The profits helped pay for a skiing holiday and whetted my appetite for investing.

A few years later, as a freelancer, I took out a personal pension, then came my first Pep (a forerunner of Isas), Perpetual’s Growth & Income fund, in 1989.

Start small: Little and often is the best way to start. Set up a monthly direct debit and keep it going through good and bad times

Start small: Little and often is the best way to start. Set up a monthly direct debit and keep it going through good and bad times

In just over ten years the Pep increased by an average 17.5 per cent a year, turning every £100 invested in October 1989 into £524.

Over the subsequent three decades I have felt the euphoria of seeing an investment soar, and angst when prices fall. But I am now far better off than I would have been if I had left my savings in a bank account.

So what lessons have I learnt that could benefit a novice?

1. Little and often is the best way to start. Set up a monthly direct debit and keep it going through good times and bad.

One of the biggest mistakes is to stop saving when the share prices plunge and start buying again when they pick up. Think about it: would you shun the shops when prices fall and only buy when they rise?

2. Don’t panic when prices slump. You are in this for the long term so stock market panics are noise you can afford to tune out. UK shares have halved twice since the turn of the century — but each time recovered.

Anyone who sold after the market fell this year would have missed a 9.1 per cent one-day rise in March and a 4.7 per cent one this month.

How picking shares became my new hobby 

Fed up with paltry savings rates, Annabel Chaplin, 26, opened an investment account during the first lockdown in March.

The building manager from East London has been saving for a few years for a deposit for her first property. 

Annabel says: ‘My Santander cash Isa was paying so little. Investing has become my new hobby. 

‘Not only am I learning lots about interesting businesses, I’m making good money – and I need to because property in London is just so expensive.’

Annabel started by investing in stocks she knew something about. 

She bought shares in luxury retailer Burberry and Barclays bank through her account with the platform Interactive Investor.

Next, Annabel decided to put some of her money into investment trusts.

She holds the oldest trust in the business, F&C Investment Trust, which launched in 1868. 

It is up 9 per cent over the past six months. Its top ten holdings include Microsoft, Apple and Facebook.

Annabel also holds Scottish Mortgage – up 46 per cent – which has Tesla, Amazon and Alibaba as its top three holdings, and the Baillie Gifford Japan Trust, up 29 per cent.

3. Dividends – income paid by companies and funds — can turbo power your investment. 

If you reinvested a 4 per cent dividend every year to buy more shares, then from a £100 start you would have £146 after ten years and £324 after 30 years – and that’s without any other growth.

4. Investment funds are generally best for small investors. These hold a mix of shares or other investments which helps to spread the risk. 

The downside is the charges — you will be paying managers a percentage to run your money and some are greedy.

5. Tracker funds are a great starting point. These just shadow the stock-market index but are very cheap. 

Most managed funds tend to underperform stock-market indices. Fees matter as they are the only guarantee in investing.

From Blue Chips to Sipps… the jargon decoded 

For first-timers and outsiders, the world of investing can be confusing and daunting. Here, Robert Jackman spells out the words you need to know to get started…

  • Absolute return – An investment, typically a special type of fund, designed to deliver a (usually modest) return even in a market downturn.
  • Assets/securities – Alternative names for individual investments.
  • Blue chip – A term used to describe large, established companies considered a lesser risk by investors.
  • Bond – Essentially an IOU that pays interest in return for you lending part of your capital. These are often issued by governments (as a way of borrowing money) and are generally considered a less risky investment.
  • Capital – The money you put into your investment account, and which you hope to grow (thus making capital gains).
  • Diversification – The process of ensuring your capital is spread across different assets. This is essentially about risk management: the more varied your investments, the less affected you’ll be should one of them crash.
  • Dividend – The percentage of a company’s profits paid to investors. The size of a dividend relative to the company’s share price is known as the dividend yield. Like all things with investing, dividends are not guaranteed.
  • Fund – A type of investment that pools together money from lots of investors to purchase different assets. Active funds are run by a manager. Passive funds track the performance of a particular market or exchange. If the market rises, so does your capital.
  • Investment Trust – A specific type of fund (active or passive) run as a company and listed on the stock exchange.
  • ISA – A tax-efficient wrapper that can hold stocks and shares (or cash).
  • Liquidity – The ease with which an investment can be turned back into cash. Publicly listed shares, which can be traded on the stock exchange, are highly liquid; art, property and wine less so.
  • Market Cap – The total value of a company’s shares, a common measure of the size of a company. A large cap company is usually worth more than £5 billion.
  • Platform – The company through which you buy your shares and funds.
  • Portfolio –  All your investments.
  • Shares – Also called stocks or equities. A type of investment that involves buying a small portion of a company, usually via a stock exchange. Shareholders own the company (or, at least, their part of it) and have the legal right to receive a share of its profits (see ‘dividend’ above).
  • Sipp – Stands for ‘self-invested personal pension’. Essentially, a pension fund where you control the strings.
  • Stock Exchange – A giant marketplace where shares and other assets are bought and sold during business hours. The biggest exchanges include New York, London, Tokyo and Shanghai. 
  • Stock Market Index – A grouping of companies from a particular stock exchange, often used to gauge the health of a particular market.
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6. Most investors hold too much money in the UK and too little in the U.S. The key is balance. 

If you have all your money in one sector of the stock market, or a single part of the world, you are leaving yourself exposed to sentiment and economic performance there.

7. You can afford to take more risk when you are young as you have more time to recover from catastrophes. Wind down the risk as you get older, but don’t get lured into swapping shares for other investments.

8. Blind faith is bad. Neil Woodford was a hugely successful fund manager delivering excellent returns to investors, particularly in the early 2000s when most shares and funds were losing money. 

But many financial advisers and investors then followed the man rather than scrutinising the investments he held in his funds.

His investment style had changed, but the advisers who should have alerted investors fell asleep on the job. Woodford’s flagship fund was suspended in 2019 leaving many poorer.

Anyone who sold after the market fell this year would have missed a 9.1 per cent one-day rise in March and a 4.7 per cent one this month

 Anyone who sold after the market fell this year would have missed a 9.1 per cent one-day rise in March and a 4.7 per cent one this month

9. Take responsibility for your money – you are the only one you can truly trust. Experts may give tips online but they can get it wrong, such as when Hargreaves Lansdown clung to Woodford funds. 

Do your own research and read the money pages of newspapers. Above all, beware of scammers, so never take advice from cold callers and social media tipsters. They always have an agenda — to make money at your expense.

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10. Make sure you understand what risk really means. It is not just the chance of share prices falling, you must also realise that the spending power of your money will fall as inflation eats into it. 

Oh, and don’t forget to spend your money. Anyone who has seen The Wolf Of Wall Street knows the investment industry wants you to stay invested. 

Then they take your cash as fees and spend it on their homes, cars and yachts. So, invest with aims and enjoy your money.



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