Here at the Fool, we’re big fans of perusing the latest results from a company, looking at its balance sheet, and scrutinising the actions of management. Why? Because we believe that private investors are capable of achieving market-beating returns so long as they buy great shares and hold them for years, rather than hours.Â
But stock-picking isn’t for everyone. Many people simply don’t have the time or inclination. On top of this, I wouldn’t be surprised if some would-be investors caught sight of the recent, dramatic sell-off and decided that equities were simply one big fright-fest.
Thankfully, there’s another route to riches which can be undertaken in four (relatively simple) steps.
1. Open a stocks and shares ISA
Protecting your money from the taxman has huge implications for your achieving your financial goals. For this reason, opening a stocks and shares ISA, rather than a bog-standard trading account when starting your investment journey, is a no-brainer.
In addition to the government allowing you to shelter up to £20,000 in the current financial year, any profits you make after investing are free of capital gains tax and income tax. This relief may be small to begin with, but it can lead to dramatic results in time.
2. Invest in index trackers or exchange-traded funds
For those with only a passing interest in the stock market but a desire to secure a comfortable retirement, I think index trackers, or exchange-traded funds, make for ideal investments.
The beauty of these passive investment vehicles is that they do exactly what they say on their respective tins. A FTSE 100 tracker, for example, follows the FTSE 100 index. If the index rises, the value of your capital rises. If it falls, guess what happens?
This kind of investment ensures that you’ll always achieve almost exactly the same return as the market (and probably far more than if you were to use an expensive, active fund manager). You’re likely to also receive dividends which can then be re-invested, or used elsewhere.
3. Take advantage of pound-cost averaging
This is simply the practice of buying shares at regular intervals. For most people, this will mean on a fixed date, every month through their broker (which costs much less than if you were to buy the shares on a whim). In many cases, the minimum investment is only £25.
The great thing about regular investing is that it helps to smooth out market volatility. When prices are high, your money buys less stock and vice-versa. This is why, as a long-term investor, you should be craving a falling market over a rising one, at least until you’re nearing retirement.
4. Sit on your hands
Theoretically, the fourth step is the easiest of them all. In practice, however, the temptation to meddle with your portfolio is hard to resist. But resist you must if you’re to get the full benefit of compounding.
Yes, in the topsy-turvy world of the stock market, doing nothing usually gets better results than doing something. It’s counter-intuitive to the idea that success needs to be chased and that’s why it’s so difficult for most people.
Since, as a passive investor, you can afford to relax even when markets drop, there really is no need to spend anything more than a few minutes every year checking how your portfolio is doing.