HAYSTACK
HAYSTACK
If you cannot find the needle, then buy the haystack!
HAYSTACK
NEEDLE IN A HAYSTACK
There is a big difference between trading and investing. It is key to understand the difference between the two and why they should not be confused.
Trading securities or currency or commodities is a specialised activity that is usually much more complicated.
It is not an activity that is suited particularly well for retail investors.
A retail customer has a better chance investing longer term in a broad market index with minimum loads (costs). It is important to know however that we should not spend time looking for that needle in the haystack. It is probably well hidden from sight and the professional investors will anyway have a better chance of finding them as they command legions of analysts whose job it is to sift through the data.
So, instead of buying the needle (metaphor for an individual share), the retail investor should buy the entire haystack
i.e. a basket full of shares or a low cost index fund.
VARIETY IS INDEED THE SPICE OF LIFE
Just because we are buying an index does not mean that we are restricted in terms of options. In the UK, we can buy the FTSE All Share Index, FTSE 250 Mid Cap index, FTSE 100 Index or indeed any of the other indices on offer by the major investment companies.
As they all follow the market passively, the key here is cost.
An actively managed index or a fund will have charges that are eye-wateringly high. On the other hand, the S&P 500 Index can be bought with fees as low as 0.07%. Compare that to an active fund manager who may charge over 2.0%, almost 30 times more expensive!
SMART CHOICE
For most retail investors, buying a low cost index fund will always remain the smart choice.
If we feel particularly adventurous, we can buy an Emerging Market index fund, if we feel we want to invest in European countries or Japan for example, there are wider choices available with low fees.
Also, the higher liquidity of these funds means that the chances of them folding are fairly low.
STEP UP CASCADING DRIP
So now that we know what to invest in, how do we begin?
The usual way to start is to have a small, monthly Direct Debit setup to buy a cheap, low-cost index fund from a reputable organisation.
May be consider starting with about £25 per month.
As our disposable income increases, we can always increase the monthly investment amount fractionally every year.
By buying monthly, we benefit from something called Pound Cost Averaging which means we buy more index units when the markets are lower and lesser index units when markets are higher.
Over the years, our accumulation of the units continue and as the value per unit increases, our wealth does too.
SUMMARY
We will not say anything about getting wealthy quickly here.
No one knows how to do it.
Some have managed by picking random stocks and shares but it is a strategy that is fraught with danger.
Never look for the needle in the haystack however tempting it may be.
Remember, diversification as provided by a low-cost index fund reduces risk, increases returns and ultimately gives us an edge over the professionals.