Investing for beginners course: module two - Times Money Mentor (2024)

It’s not always an aversion to risking money on the stock markets that stops people from investing.

Very often, the number of different types of investment available can be bewildering. That’s why in this module, we will focus on:

• Understanding your attitude to risk
• Understanding your investment options:
  • Asset classes
  • Collective investment schemes
  • Sectors
• A case study of a real investor, plus an interview with a celebrity to find out how they invest

Our free, easy to understand, Investing for Beginners course will teach you everything you need to know and give you the confidence to get started. There are five modules in total. If you missed the first one, check out module one now.

Investing for Beginners: the course

• Module 1: Why invest?
• Module 2: Understanding your investment options
• Module 3: Getting started and choosing funds
• Module 4: Deciding how much – and how often – to invest
• Module 5: Staying on track and reviewing your progress

Module two: Understanding your investment options

Before we go into detail about the different investment options, you should try to understand your attitude to risk.

Attitude to risk

In addition to what you invest your money in and how, you need to give serious consideration to your attitude to risk and capacity for loss.

Does the thought of losing money – even in the short term – send you into a tailspin. Or do you accept that it’s an inherent part of investing and you’re prepared to take a calculated risk for better returns in the long term?

Again, it is a very personal choice and wherever you sit on the spectrum, there are investment strategies open to you. However, it’s important not to let emotion cloud your financial decisions.

How much risk you can afford to take should also be influenced by practical considerations, such as the timeframe and your investment objectives.

• If you’re about to retire, or need to start withdrawing your money from a savings account, an investment in higher-risk areas may not make sense.
• But if you’ve got 10, 20, maybe even 30 years in which to ride out short-term market volatility, it could prove a very shrewd move.

It’s all about striking the right balance: take too much risk, spend too much time speculating on the next big thing, and you could lose more than you’re comfortable with; don’t take enough and you may not get the returns you need to achieve your financial goals.

Take our quiz to see what your risk tolerance is likely to be when it comes to investing.

1. Understanding asset classes

A good starting point to understanding the different types of investments available is to look at the assets you can invest your money in.

Investments with similar characteristics are grouped into asset classes and there are four key options:

• Cash
• Buy shares in companies
• Bonds
• Property

Each asset class performs differently in differing economic conditions. The idea is that by spreading your money across the full range you guard against the possibility of being over-exposed to a price downturn in any asset, market sector, company or country.

You reduce the level of risk in your investment portfolio and increase your chances of consistent returns. Equally, a good asset spread will mean you don’t miss out on upturns in share prices or interest rates.

Not sure if you are ready to invest? Take our quiz in module one to find out.

If you’re ready to start investing, the chances are that you’ve got any need for quick access to cash covered in savings accounts. If you own your home, you may well have some property in the mix already (although you can diversify more with other types of investments such as in commercial property should you so wish).

This means the next step is usually investing in the stock market, buying shares in companies, and bonds, which are interest-paying loans made by investors to companies or governments in need of cash.

Loans to companies are called corporate bonds, while those to governments are called government bonds or gilts. Interest payments are linked to the likelihood of the borrower defaulting on the loan, with the highest risk paying higher interest rates.

As a general rule, though, bonds are considered to be lower risk than shares.

You might want to read: Is now a good time to buy shares amid the coronavirus pandemic?

Asset allocation

You control risk through your asset-allocation strategy – how you spread your money across different asset classes.

• Adventurous investors will put more of their money into shares and perhaps riskier shares, such as emerging markets or smaller companies.
• Cautious investors will rely more on investments like bonds.
• Balanced investors will sit somewhere in the middle.

Whatever category you sit in, you need to have a diversified portfolio and not put your eggs in one basket. Stake too much of your money on one investment and your wealth could take a serious hit if it doesn’t deliver the performance you expect.

2. Understanding collective investment schemes

You can buy company shares individually and build a diversified portfolio that way.

However, the lower risk cheaper option is to buy shares or units in a collective investment scheme.

This is where money from different investors is pooled together, put into shares or other assets. The types of investments are often overseen by a fund manager.

Collective investment schemes include:

• Mutual funds
• Investment trusts
• Exchange traded funds

You benefit from economies of scale and you’ll also get the advantage of a fund manager making all the difficult decisions on what to buy, what to sell and when.

Find out more: How to choose investment funds

You can choose from a variety of collective investment schemes:

Mutual funds

The most common are funds, which may also be referred to as unit trusts, Oeics (open-ended investment companies) or mutual funds.

Some points about funds:

• When you invest, you buy shares or units in the fund.
• “Income units” pay returns to you.
• “Accumulation units” are reinvested for further growth.

Accumulation allows you to harness the power of compound interest. This is where you earn a rate of return from both the original money invested and the returns that capital has already earned.

For more on compound interest, check out the video in module one.

Investment trusts

Investment trusts offer an alternative option. These are similar to open-ended funds such as unit trusts but there are some differences:

• Investment trusts are listed on the stock market in their own right and issue a fixed number of shares when they’re set up, which investors can buy and sell.
• This means investment trust managers always have a fixed amount of money at their disposal, and won’t have to sell holdings to meet consumer demand for cash, which can happen with unit trusts.
• Unlike unit trusts, the manager is able to borrow to invest; this can boost returns when markets are rising, but exacerbate losses when they are falling.

Exchange traded funds

You may also have heard of exchange-traded funds. ETFs are baskets of shares or bonds bundled together to track a particular index such as the FTSE 100 – the 100 largest companies on the London Stock Exchange.

Here are some points about ETFs:

• Most ETFS are not actively managed, meaning a fund manager isn’t picking individual stocks.
• ETFs will never outperform the market, they merely track it.
• ETFs are cheaper than most funds and different types of investments such as trusts.
• In addition to being a quick route into the UK or international stock markets, ETFs can give you access to commodities such as gold and other precious metals. More on ETFs later.

You can shop around and research these options easily online – the big investment platforms will let you do this before you have opened an account.

Active versus passive funds

Within these sectors, you will come across two very distinctive types of investment approaches: active and passive fund management.

Active funds buy investments in the hope they will beat the market. However, passive funds such as ETFs simply seek to mimic the performance of financial markets, such as the FTSE 100 or the S&P 500 in the US. This is why they are also known as trackers.

Find out more: How to choose investment funds.

Which you go for comes down to personal preference and it’s a subject that continually divides opinion.

Pros and cons of passive funds:

• Pro: The key advantage of trackers is that they are cheap because they don’t require nearly the same degree of management.
• Con: They will only ever perform as well as the underlying index.

Pros and cons of active funds:

• Pro: For the possibility of stellar performance, you will need an actively managed fund.
• Con: The downside is that they are more expensive and there’s no guarantee they will beat the index; you could end up paying more and only get average performance, or worse.

If you go down the active route, you need to do your research. We will get to that during this course.

Investors often try to get the best of both worlds. They will hold the bulk of their money in one or a number of core tracker funds, and supplement that with smaller sums in a couple of carefully selected active funds to spice things up a bit.

3. Understanding sectors

To make it easier to shop around for funds or trusts and to enable comparisons between them, they are grouped into sectors.

This might be by region, such as UK All Companies, global or North America. Some funds are grouped by company size and region, such as European Smaller Companies.

The above are all share-based sectors but there are also bond fund sectors as well as mixed-asset sectors that offer both.

Funds that focus on delivering an income, or dividend payments, to investors are often grouped together too, such as UK Equity Income.

You might want to read: Guide to investment trends 2021.

Investor case studies

Hopefully, you now feel more confident about the investment options open to you. To give you a bit of inspiration, we spoke to an investor, Deborah Bartlett, about how she invests – and what her goals are.

We also interviewed Lord Lee of Trafford, known for being the first ISA millionaire, about his types of investments – and his tips for beginners.

Deborah Bartlett: “How I invest my money”

Deborah Bartlett, 59, from Crawley in West Sussex, made her first foray into investing in 2005 – and has been able to retire early using the proceeds, and also buy a motorbike to go travelling when lockdown ends.

“My daughter was turning 13 and able to get herself to and from school, so I chose to go back to work. I hadn’t started saving in earnest and I knew I had to make up for lost ground,” she explains.

“I wanted to be in a position to retire early. I won’t get my state pension until I’m 67 and I always knew that there was going to be a big gap to fill.”

Last year, Deborah – who spent her career in the aerospace industry – was able to achieve that goal.

Although she started getting investment advice from a financial adviser, she took the decision to manage her investments herself when she retired. Find out: How much does financial advice cost – and is it worth it?

Last year moved her stocks and shares ISA to the Fidelity investment platform.

Deborah describes herself as a bit of a risk-taker: “I’ve always been ambitious and was able to buy my first flat at 22. I took some chances but was able to achieve my goals.”

This attitude to risk is reflected in Deborah’s fund choices. She selected 10 types of investments:

• Eight actively managed funds
• A bond fund
• A passive tracker fund

“Everything I read suggested I should have bonds, trackers and property, but I’ve had my fingers burnt with commercial property before.”

She adds: “My money is split across Japan, China, Asia in general and global funds too. With the global funds, I looked at the top 10 holdings, so I could make sure I didn’t have any crossover between them. I want to be invested in different companies in different funds.”

She has also used her own interests and experiences to choose funds such as Smith & Williamson Artificial Intelligence. “I had always seen the benefits of AI in industry, but there is still massive opportunity in other areas.”

Now she has retired, Deborah needs her money to carry on working: “I want to be able to enjoy life rather than scrimping and saving. I’m into motorcycling, and in lockdown I was able to buy a new bike; I don’t want to worry about whether or not I can afford to go off on a big trip to Europe.”

Investing spotlight: Lord Lee

Lord Lee of Trafford, the former Conservative MP turned Liberal Democrat peer, is one of Britain’s most prolific investors and known for being the first ISA millionaire, a feat he achieved in 2003.

Now 78, he has invested through four financial crises – in the 1970s, Black Wednesday, the dotcom bubble and the recession of 2008 – and written several books on the subject of investing, including most recently Yummi Yoghurt, about a fictional family company that will start investing in stocks. He only invests in UK shares.

What investment successes have you had over 50-plus years?

In 1967, I bought 100 shares in Morrisons supermarket at 27 shillings and 6 pence each [totalling about £139], and sold later that year for 34 shillings each [totalling £169], resulting in a £30 profit.

In 1977, I invested £10,400 in Madame Tussauds – the shares were 50p – and sold the following year in the midst of a takeover bid for £13,000.

In 1984, I bought £8,700 worth of shares in an East Anglian company called Wire and Plastic Products. It made things like supermarket trolleys. A then-unknown Martin Sorrell came along and bought a significant share of the company, and the shares trebled. A year later, I sold my shares for £25,700; I should have kept them for longer as the company ultimately became WPP, the world’s largest advertising and PR group.

In 1992, I bought £5,500 worth of shares in Border Television, an independent media company chaired by Melvyn Bragg, which broadcast along the English-Scottish border. Six years later, I sold for £17,100.

In 2008, the market was depressed after the sub-prime mortgage crisis in the US, but I saw there were good-value companies priced very low by the market that would eventually recover. I bought £62,000 worth of stock in Fenner, a market leader globally that makes conveyor belting for mining. I sold my shares between 2009 and 2014 for £286,000.

Do you take a particular approach to investing?

When I like a company, I might initially put my toe in the water and invest a small amount. As I get to know the company and continue to like what it is doing, I usually buy more shares.

It’s what I have done with the flavours and fragrances company Treatt. I started buying shares in 1999 and have bought more on 26 occasions since then. Those shares have turned out to be a “20 bagger” [a stock that provides a return of 20 times the investment].

What investment advice do you have for beginners?

Try to understand the company’s business. Ask the company registrars for the last annual report. Look for moderately optimistic comments from the chairman or chief executive.

Ignore minor share price movements when deciding to put your money into different types of investments. If you like the company, don’t be put off because the shares have risen a few pence since you first looked at them. In five years, you’ll have either done well or not.

We all make mistakes, so take a loss on the chin and move on. Not only is it for the best financially, it can be debilitating for your confidence to hear or see anything about the company that has personally cost you.

Don’t treat the stock market like a casino and focus on quick profits. Avoid chopping and changing shares; if you’re invested in a good, growing company that increases its profits and dividends, then stay aboard long-term.

Investing for Beginners: the next modules

Well done for completing Module 2 of our online investing course. Keep going with the next three parts of the free course to understand how investing works, and whether it’s right for you.

• Module 3: Getting started and choosing funds
• Module 4: Deciding how much – and how often – to invest
• Module 5: Staying on track and reviewing your progress

Extra-curricular: Got a large amount of money to invest? Check out our tips in How to invest £10,000 and How to invest £50,000