Friday, 12 June 2015

Investing money in the stock market

Before I begin, let me say loud and clear that I am not qualified to give financial advice. If you follow any of my suggestions, you do so at your own risk.

In recent years, I have been looking at ways of investing some savings. The interest rate in Britain has been 0.5% since 2009, which is fantastic for people with mortgages. But it's pretty rubbish for investors, even if you're prepared to lock away your money for five years. I wanted to know if there was a way of getting better returns.

I have done a lot of reading recently about financial investment. I read blogs by companies who sell financial services. I read news articles in a wide range of news-papers. I searched for stuff that famous investors like Warren Buffet have said, and I even went as far as purchasing some books. The main message that I learned was this:

Whilst the stock market is volatile, and goes up and down like a yo-yo, it consistently produces very good returns on investment in the long-term.

The best evidence for this is to look at how pensions companies behave. Every month, money goes into my pension pot, and the pension company buys investments with that money so that it grows over the decades until I retire. Where do they invest that money? They invest in the stock market. Why? because the stock market consistently produces very good returns on investments in the long term.

As an aside, perhaps the best advice that nobody ever gave me when I was young was to pump as much money into a pension as you possibly can before you're 30. The effects of compound interest are staggering if you can put 10% of your earnings aside for a very long time.

So I did some more research, and looked at companies that should perform well in the long term. I looked at their ability to make money, what dividends they return, and tried to find out how healthy these companies really are. I tried to imagine what their business will be like in 20 years. I bought shares in half a dozen companies in different industry sectors, and told myself not to panic if anything went wrong. Most of them were a good buy.

I use Yahoo Finance as a starting point for information about companies and shares. For example here is their page for Vodafone (I don't own any shares in Vodafone). All the numbers, graphs and news about that company are all in one convenient starting place.

The mechanics of buying shares is easy. I purchased mine through a Shares ISA so that any profit, interest or dividends are not liable to tax. MoneySavingExpert lists the details.

One of the shares I purchased didn't do so well. I thought that a large supermarket would be a safe company to invest in. People will always need to buy food, and they have a wide presence across the UK. I didn't foresee that they would be in the newspapers for the wrong reasons. In my haste, I overlooked the fact that many customers (including me, ironically) prefer a cheaper supermarket. The share price is still 13% below what I paid for it six months ago.

The final bit of advice I learned in my research (did I tell you, by the way, that you need to do lots of research?) was not to follow your feelings. Should I sell the shares and cut the losses? I have to remind myself that I'm in this for the long term, and not to be sidetracked by what I feel.  Warren Buffett again:

"Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant."

In closing, if you're considering investing in the stock market, there are three things that I think you should do. First, do as much research as you can. Second, look at the long term. Third, start investing now (as soon as you've done enough research) so you can take advantage of the long term.

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