Five things first-time investors must do – and five things they mustn’t

Investing for the first time is a big step: if you put money into the stock market or other financial assets you are letting go of the certainty that comes with cash savings and exposing yourself to the risk of loss. 

Avoid the pitfalls and it could be the best decision you ever made; rush in headlong and you may have lifelong cause for regret. 

Investing, alas, can get enormously complicated so here, to get first-timers going, are five simple dos and don’ts.

Five things you must not do

1. Put everything into crypto

It could be enormously tempting, if friends or family members have made big gains on Bitcoin or other cryptocurrencies, to follow suit. 

A toe in the water (let’s say with 1pc or 2pc of the sum you have available to invest) is fine but putting it all into crypto is a recipe for disaster: these assets are simply too risky and volatile. 

Any digital coin other than Bitcoin is even more so. Read more here.

2. Put everything into anything else

The essence of reducing the risks that are part and parcel of investing is to diversify: to spread your money among a variety of assets.

At its simplest level, this could mean buying shares in 10 or 15 different companies rather than one (see our rules here). It can also involve assets other than shares, such as bonds or funds (which can themselves invest in various assets, such as property or commodities).

3. Buy individual shares (unless you are ready to do some serious work)

Buying those 10 or 15 shares as we mentioned just now might give you some diversification but it would also give you a lot of work, as ensuring that each of the shares is right for you (and remains so) and that collectively they form a coherent portfolio can involve an enormous amount of time and energy. 

If you’d like a less intense investment experience, choose funds – our list of funds for first timers is here.

3. Use spread betting, CFDs or other toxic but widely advertised substitutes for real assets 

We’ve all seen the adverts, typically with a young, cool man or woman looking at their phone and giving the impression that, if you just do what they are doing, you could be as glamorous, rich and successful as they are. 

And they, of course, are using a spread-betting app or putting money into things such as “contracts for difference”. 

In the small print those same adverts will tell you what percentage of the advertiser’s customers lose money – and those percentages are typically in the region of 70pc or 80pc. 

Heed these companies’ own warnings and avoid their products. Using them in like entering a casino, and we all know the house always wins.

5. Listen to your friends

We’ve already referred to the dangers of peer pressure when it comes to crypto but it’s best to be highly sceptical of any investment advice you hear from friends, family, colleagues, social media posts and the like. 

These sources are highly unlikely to help you achieve the kind of portfolio – diversified and suited to your tolerance for risk, your goals and your time horizon – that you need. Instead, read on…  

Five things you must do

1. Appreciate the absolute basics

Don’t even bother investing if you cannot commit to it for the long term, by which we mean an absolute minimum of five years and preferably much longer. 

Remember always that there are very few certainties when it comes to investment and that you must be temperamentally able to cope with sudden shocks and setbacks (think of the effects on markets of the pandemic or the financial crisis). 

But remember too that if you have a suitable portfolio and a long-term approach, you should do well in the end, despite such unforeseen disasters. For more, read this Telegraph Money guide.

2. Decide how much effort you want to put into it

We’ve already mentioned that how you invest is in part determined by how much time you can devote to it. Think about this hard before you invest anything. 

If, once you’ve started, it becomes clear that your investments need more monitoring that you are able to give them, change tack and choose an easier way to invest, such as via a “tracker” fund that aims to replicate the returns of the global stock market. 

The Telegraph’s list of our 25 favourite funds may help.

3. Keep your emotions (positive and negative) in check 

Investors are human beings and human beings are emotional animals. And pack animals too – so there is always the danger that we follow the herd rather than a rational investment methodology. 

Be equally sceptical of mass enthusiasm for the stock market (or any financial asset) and its reverse, universal pessimism. Either is likely to lead you to take decisions you will regret.

4. Be on constant alert for scams 

Fraud is everywhere (who would have thought the humble QR code could cheat you out of your money?) and never more so than in the world of finance. 

So ignore unsolicited or unexpected communications of all kinds and use known professionals who work for reputable, regulated companies in all your dealings with investments.

5. Choose a solid broker 

Even if you follow the previous point you can lose money (or at least have it tied up for months) if you are unlucky enough to end up with a failed broker. 

There are plenty of solid ones to choose from, including Hargreaves Lansdown, Fidelity Personal Investing, AJ Bell and Interactive Investor.

Have we missed anything? Use the comments below to tell us what you wish someone had told you before you started to invest