I’ve been writing for The Motley Fool for almost 20 years now, and helping people understand the stock market and make the most of their investing potential has become something of a passion of mine. But, although the investing world has been opened up enormously from the days when it was the preserve of classic City types, I’m surprised how a lot of hoary old myths still persist.
Only for the wealthy
The stock market is only for people with a lot of money to invest? That might have been true when it was a closed market and you could only get in if you had an expensive stockbroker, but it’s entirely false today.
The opening up of the market coupled with the advance of the internet has brought charges down to almost silly cheap levels these days. I use an internet-based execution-only broker, and it costs me a fixed £11.95 to buy or sell (and there’s a 0.5% stamp duty tax added to buys). In fact, I’ve just sold some shares today for £1,350, and the charge amounts to just 0.9% — and had I sold twice as many, it would be just 0.45%.
There are even cheaper brokers out there, sometimes with a bit less flexibility. But the bottom line is that charges are low enough these days to make just a few hundred pounds a realistic sum to invest in shares.
Very risky
I was speaking to a financial adviser recently, and when I told them I invested in shares, the response was “Ooh, you like risk“. If even financial advisers think that way, it’s hardly surprising that many other people do. And in one way, they’re right — but only when you think of relatively short-term investments.
If your investing horizon is less that 10 years, or with money you might need in the next few years, I agree it’s risky. Share price charts over a five-year period are often full of big ups and downs, and you can lose a chunk of your money over the short term.
But if you invest for at least a decade, and ideally longer, you’ll greatly reduce the risk. Examine long-term charts, and you’ll see the ups and downs looking a lot smoother.
Diversifying can lower the risk too, and spreading your cash across, say, five to 10 different stocks in different sectors can make for a much safer outlook.
Only for the super-smart
Investing is fiendishly complicated and you need a super-bright brain to do well, don’t you? While investing professionals might like that to be true, it simply isn’t. Let me suggest a strategy to disprove it.
Invest your money in a FTSE 100 index tracker fund.
There, I bet that didn’t make your brain hurt one bit, did it? You’ll bag returns in line with the FTSE 100 index (minus annual management charges, which are typically less than 1% per year for index trackers). Studies by Barclays suggest you’re likely to earn around 4.9% per year above inflation averaged over the long term.
It might surprise you to learn that the majority of the clever clogs running managed funds fail to beat that, and from there you can branch out to seek even better returns.