Advice on starting out please

22nd Jul '18 by gregpark

33 comments 7322 reads

Hi There

I'm getting into investing for financial stability and I wanted to get some advice on a approach to getting started.

I will be putting away a few hundred a month possibly more when I improve my knowledge. I understand and the principals behind the NAPS Portfolio on here but will only be able to invest in a few shares at a time.

Would people advise investing in 8-10 stocks then broadening out my portfolio over time or should i bulk it out and reduce risk with EFT's and possibly unmanaged funds?

Thanks in advance

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Gregpark

Premium Member

33 comments

melody9999

23rd Jul '18

I'd add PCT to the IT list. I'd also be cognisant that we are overdue a general market correction. So I'd leave a % in cash each month - then use this cash pile to invest after the correction when the market starts to rise again and prices are lower. Recognise this will be difficult to do, because at that point you may sitting on an overall loss.

Leebod

24th Jul '18

If you are starting out on this investment lark I assume you will be using an ISA to deal from - find the lowest per trade dealer you can - i use iweb owned by halifax and at £5 a deal (plus taxes ofcourse) they are cheap and cheerful. I'm just reading the Naked Trader book myself and although there is a lot of waffle and very poor jokes the section on how to actually invest and his tips on how to filter through company reports are very very good. Key things I have learnt in my two years of doing this - don't buy shares on a whim - it's effectively gambling. Don't sell too early. I don't have a massive portfolio but I've lost thousands on shares like purplebricks / fevertree by doing that. In fact I still do it now Impax Asset Management (LON:IPX) being the last example where I sold on a slight downturn (instead of topslicing!). Always employ a trailing stop loss and make sure its NEVER more than 20% and in the early days I'd stick to 10% or even 7-8% on some (Minervini will tell you 7 or 8% is the best stop loss - you will win if 7 shares get stopped out but 3 grow). Never buy shares after a big fall - WAIT, then WAIT then WAIT some more. If they are truly in recovery it will be easy to see. I've bought lots of bargain shares which then did nothing or went even lower stopping me out and costing me money for absolutely no reason other than the irresistible lure of something CHEAP (wrong EXPENSIVE!!). Oh and although funds are more sensible it doesn't have the same feeling as finding / researching and buying a company that then goes upwards a significant amount. I have lots of funds but if you want to learn then I'd still go with shares and make all your mistakes with smaller amounts of money. Someone suggested a fantasy portfolio - useful in theory but boring in practice - will you really manage a fantasy portfolio in the same way as real money? would you really research in the same way?

Cheers

Gromley

24th Jul '18

Some great advice here and certainly you need to think about what your longer term objectives are.

“A few hundred a month” is not going to produce life changing returns in the short term, but could enable life learning imho.
You have expressed an interest in a NAPS style approach and I would say that seems like a sound starting point. You can fairly easily mechanically select your portfolio and you’ll learn about the stocks you hold as you progress so you can get a feel for whether “deep fundamental analysis” or “trading” or “factor investing” is your thing.
However I do think that getting near to the 20 stocks outlined in NAPS is to be highly recommended. It’s a fundamental part of NAPS and I think also gives you more opportunities to learn from a manageable number of positions that you can get to understand. I think a more concentrated portfolio steers you towards being a “stock-picker” needing to having significant faith in the individual companies you invest in. This may or may not prove to be your thing, but I think there’s a lot to be said for taking a more balanced approach early on.

Of course being able to invest in a reasonable number of stocks is the big challenge, if dealing costs are say £10 then it would be daft to invest £100 – that’s a 20% headwind you would have to overcome!

There is though another way – spreadbetting. (There I said it).
For many the association will be with high risk, frequent trading, leverage and losses. It does not have to be that way however and it could be a valuable tool for someone in your position.
You can use spreadbets for longer term holds and you do not have to deploy leverage – if you put £100 in a Spreadbet account you can in theory trade in up to £500 of stocks – but you don’t have to, you can limit yourself to only trading £100.
A key benefit though of spread bets is that they are cost effective when buying small quantities, you can generally bet position sizes as small as “50p / point” – in normal speak this means 50 shares.
There is no £10 (or whatever) transaction cost, instead the spreadbet companies effectively levy the trading cost in percentage terms by adding a little to the spread (i.e. you’ll pay a little bit more than the going rate when buying and receive a little bit less than the going rate when selling). The increased spread also effectively charges you interest (even if you fully fund you account).
If you were to limit yourself initially to shares with a shareprice of £2 or less, you can build position sizes of only £100 – which would give you the ability to diversify even with your limited starting funds.

I ran a quick review attempting to apply all of Ed Croft’s NAPS rules to stocks trading at £2 or less and came up with the following 15 candidates (you could increase the number if you relaxed the diversity rules somewhat). So you could buy this portfolio for £1,500 at £100 per stock, which you could build up in a few months.

Stock	StockRank	Shareprice (p)
Griffin Mining (LON:GFM)	100	144
Globaltrans Investment (LON:GLTR)	99	10.2
Marshall Motor Holdings (LON:MMH)	98	157
Hansteen Holdings (LON:HSTN)	98	109
Belvoir Lettings (LON:BLV)	98	104
EI (LON:EIG)	97	156
CMC Markets (LON:CMCX)	97	189.8
NWF (LON:NWF)	96	190
Van Elle Holdings (LON:VANL)	96	82
Communisis (LON:CMS)	96	51.2
Steppe Cement (LON:STCM)	96	27
MHP SE (LON:MHPC)	92	12.6
Johnson Service (LON:JSG)	79	128.4
Vodafone (LON:VOD)	74	178
Centrica (LON:CNA)	70	151.8

If you wanted to take this approach, then I would strongly suggest researching precisely how spreadbets work and setting yourself some very firm rules to ensure that you don’t get tempted by the attractions of overtrading or leverage.

If you continue to build up your investment pot you could then choose to migrate to actual share positions in due course (the %age nature of the costs in SBs means that the become less cost effective as position sizes increase)

Just a thought and hopefully one that is not too “left field”.

pka

25th Jul '18

That's a very interesting post about spread betting, Gromley.

I'm thinking about using spread betting myself, but know very little about it, so I'd be grateful for some advice on the following questions:

(1) Which is the best spread betting company to use?

(2) Is there tax payable on any profits from spread betting?

(3) If I used spread bets for longer term holds, don't deploy leverage and fully fund my account, what are the costs likely to be in percentage terms?

(4) If I used spread bets to short stocks with low Stockopedia QVM Ranks as a way of hedging my 'long' investments, are there any things I should worry about?

gregpark

28th Jul '18

thats a great comment thanks very much, I've ordered the naked trader and will be going through that. the stop loss makes a lot of sense and at the moment i'm super cautious and am researching a lot before i make my first move.

JohnEustace

28th Jul '18

I'm a few weeks ahead of you in learning spreadbetting having bought the Naked Trader book on the subject the day it was released. It's a good read. Gromley's post is very much in tune with Robbie's concept of the "spread ISA".

Don't risk any money you can't afford to lose etc. because the great majority of clients do lose. But they are largely trading indices and forex so don't do that. After Aug 1st the new regulations come in that protect non-professional clients from losing more than they put into their account, which will reduce the leverage available. So I would wait a few days before opening an account just to avoid the transition date.
One thing I have learnt is that being over cautious and setting stops too tight just means getting stopped out all the time by intra-day movements making the exercise pointless. You do need to budget to give your positions a bit of breathing space.
I'm with Spreadex. As I say I only have a few weeks experience but so far it works fine for me.

PhilHofGrowYourDough

28th Jul '18

Run a fantasy fund that mirrors your personal investments.
If you invest 10% of your funds in ACME company buy 10% in the fantasy fund.

You can then invite people to comment on your choices/strategy.

Best of luck
Phil

Cuthbert C

28th Jul '18

Greg

Strongly agree that Investment Trusts are a good place to start

You could do a lot worse than check out http://johnbaronportfolios.co.uk

JB is an MP and ex fund manager who specialises in analysing IT's and constructing/managing portfolios of IT's

You can get a trial membership for free which will give you enough time to read everything on the website. I think it's v useful. I'm a satisfied subscriber and use his ideas for the 25-30% of my portfolio that's in IT's.

T

gregpark

28th Jul '18

hi T

thats another great idea, i read his article on investors chronicle but didn't knife about his site.

thanks loads.

greg

Gromley

31st Jul '18

Interesting questions pka and funnily enough I was thinking about some of those questions a few days ago.

(1) Which is the best spread betting company to use?
I can’t really advise on the best SB co, but I do use IG, City Index (having just taken over Finspreads) and more recently Spreadex (but I haven’t used them too much yet).

City Index seem to have the narrowest spreads, but offer a more limited set of stocks than IG and also only offer SBs two Quarters in advance (whereas IG offer positions three quarters out). Can’t comment too much on Spreadex yet (but they seem to have an even broader set of stocks, but possibly slightly wider spreads).

(2) Is there tax payable on any profits from spread betting?

There is currently no tax payable on spreadbets, but of course that cannot be guaranteed in the future.

(3) If I used spread bets for longer term holds, don't deploy leverage and fully fund my account, what are the costs likely to be in percentage terms?

To understand the costs I think it’s important to understand how spreadbets work.

There are DFB (Daily Funded Bets) which do not expire and you are charged cash interest on the position each day. These will tend to be more expensive than Forward bets if held for any length of time.

The forward bets expire on a given date.

Hopefully the example below will make this clearer, this was a snapshot of the price on offer by IG for Dunelm (LON:DNLM) last week.

	Buy	Sell	Mid	Spread
Market(*)	522.3	521.3	521.8	0.19%
DFB	523.4	520.2	521.8	0.61%
Sep	525	520.3	522.65	0.90%
Dec	526.7	521.4	524.05	1.01%
Mar	528.9	522.1	525.5	1.29%

You’ll see that the spread for the DFB position is 0.42% wider than the real market – effectively that is your dealing cost. (Comparing this against your dealing cost for "real shares" gives you a cut off point in terms of position size, below which the spread bet is cheaper. - Although bear in mind that your "real broker" may well get you a price inside the spread - probably not in this case, but in general)

You'll also see that the mid-price for the future positions increases the further out the position is – this is the interest they charge you – the spread also widens on the longer positions. So looking at the March position for a buy the cost is c. 1.05%, but if you want to hold for longer you would need to rollover the position in March (incurring another spread) – so I’d say the costs are currently c. 2% pa for a long term hold.

It’s important to bear in mind though that these costs are based against LIBOR so as and when interest rates rise SBs will become more costly.

On the flip side though if you are short, they are effectively paying you interest for the short position (reduced by virtue of the fact the spread is wider). I think the ‘logic’ here is that as they are using your ‘short’ to hedge other clients ‘longs’ and thus saving them money.

(4) If I used spread bets to short stocks with low Stockopedia QVM Ranks as a way of hedging my 'long' investments, are there any things I should worry about?

It's probably better for me to answer that one, in my thread on "Brokefolios" . I'll post something over there, hopefully later today.

pka

31st Jul '18

Thanks very much, Gromley, for your excellent replies to my questions about spread betting.

chillyhill1

31st Jul '18

Hi,

I've been reading lots of books which helped me to nail down my strategy

Market Wizards series
Nicolas Darvas - How I made 2M in the stock market
William O'Neil - How to make money in stocks
Jim Slater - Zulu Principle
Mark Minervini

Just a few of the better books I've read.

I would also suggest looking at the stockopedia Guru Screeners

Good Luck

Maddox

31st Jul '18

Hi Greg,

You already have a few points in your favour, specifically, you are not afraid to ask questions and I presume you are starting pretty young.

However, reading the preceding advice you have been offered, all very well intentioned, I think I'd find it difficult to decide which path to choose. This is a challenge we all face when starting out - deciding which style of investment suits our own personality and circumstances. The first choice is between investing in funds or individual shares;
>> If you have the time, interest, want to learn and also prepared to take more risk - then individual shares is probably the way to go.
>> If you don't have the time and not prepared to risk losing money then funds are probably the best option.

If you chose investing in individual stocks then a further challenge is deciding what style of investing will suit you.
I suggest you spend some time initially reading and researching the Stockopedia Guru Screen guides that reflect the various approaches together with the accompanying book recommendations. if you find a particular approach appealing then this might be the right style for you.

I'd also recommend that you get out and meet other investors and learn from them - it's a far more social activity than when I started out. There are many company presentations organised by ShareSoc, Mellow, Proactive, Equity Development and others and now the Stockopedia Stockslams. You'll learn a lot just by hearing other investors questioning the presenters.

I've been investing for about twenty years it's been challenging, fun and financially rewarding - but I still feel like a novice - there is always more to learn and improve your performance.

Best of luck and I hope you find it as rewarding as I have.

Cheers, Maddox

Gromley

31st Jul '18

You're welcome pka, it's a pleasure to be able to expand on points based on useful feedback and pertinent questions, I hope to be able to stick around and do that - aside from adding to the community I also find that it helps to focus my own thoughts.

Anyway, I have been a little sidetracked today so I'll have to wait until tomorrow to respond on the other thread to your question about a short portfolio. I'll post a nudge where when I've done that,

Gromley

31st Jul '18

Very good points maddox.

However, reading the preceding advice you have been offered, all very well intentioned, I think I'd find it difficult to decide which path to choose. This is a challenge we all face when starting out - deciding which style of investment suits our own personality and circumstances

Indeed that's why with Greg having expressed an interest in NAPS my thoughts were to continue down that line for the moment as for all of it's other merits it is quite a style neutral approach that presents the opportunity to learn about your personal investing mojo.

I've been investing for about twenty years it's been challenging, fun and financially rewarding - but I still feel like a novice - there is always more to learn and improve your performance.

I've being investing seriously for a similar timescale and I agree with your "I still feel like a novice" point and I think that is a great mindset to have. Probably 10-15 years ago I felt that I had at least risen to master craftsman status ,but that confidence / cockiness did not really serve me well. I don't have a Paul Scott roller-coaster story to tell, but I've had my share of learning points.

In fact with the help of Stockopedia I have subtlety changed my investment style ove the last 18 months or so.

Every day is a learning opportunity!

mgallear

1st Aug '18

Everbody has probably already said these things but::

Try and get a cheap broker and lower your costs as much as possible also think about using a Stocks and shares ISA. Cheap brokers can have limited share choice you can invest in and be more expensive for international trades but pro brokers can have hidden fees just for holding your account.

If you are individual it is often better to act like a trader rather than a big investor like Bufffet, read some trading books and find out some basic technical analysis - only buy shares that are obviously going up not value situations and sit around for 2 years and hope.

Timing is now a good time? We are in a bearish market at the moment and it could get worse - the FAANG stocks are down currently in the US. Interest rates will probably be put up in the Fed in September this affects all markets not just the US. (Trade Wars, Brexit etc.)

I bought in 2008 and 2009 during and after the market collapse if I did it now then all after and in better shares but you live and learn - well I hope I am.

My advice sit on your hands until October or go in small.

My web sites that might help -

http://investstrat.com/supermodel.html
and
http://investstrat.com/countryvalue.html

look at the number of markets that are bearish at the moment. This usually last 6-12 months and there is the possibility of a big collapse before they start to go back up but this would not be normal.

Good Luck

Mark

andrea34

1st Aug '18

Hi,

Although I have been buying/selling shares for many years, I don't know as much as perhaps many on here. You don't say how much knowledge you have of the markets, so I will assume not much, though this may not be the case. However, here are my own suggestions, some of which may be echoed by previous comments and others are contrary to them:

I would start off for the next few months by putting around £200 per month into a selection of four unit trusts (£50 per trust). You can do this with Hagreaves Lansdown, who will not charge you anything for having an account with them to trade in these trusts, and they will also cover a large proportion (if not all) of the initial charges that individual fund managers would charge if you went to them directly. Unit trusts are safer than investment trusts because the fund manager cannot borrow extra money (i.e. take on debt), they rely on investors buying units in these trusts to increase the overall fund size. By investing on a monthly basis, the guesswork is removed as to when to buy... because even seasoned investors don't get it right half the time. If you invest in 3-4 trusts per month, you can diversify your investments across different geographical markets and sectors. This way, if the UK market does poorly but the Japanese market does well, overall you should in theory do okay. So you could buy a UK trust, a European one, a Japanese or Asian one, and one that specialises in technology companies. You can check the performance over 1/3/5 years on Trustnet, as well as ratings such as risk. Current favourites of mine which I hold include Baillie Gifford Developed Asia Pacific, Jupiter European, and Janus Henderson Global Technology. I would do these investments in a Stocks & Shares ISA.
Any spare cash that you have per month I would currently sit on it until you become more comfortable with the markets and feel you have a little knowledge. There are regular savings accounts out there which offer 5% if you put money into them on a monthly basis over a 12 month period, which is way more than any ordinary savings account will offer you.
Another reason for not investing any additional cash at the moment is because the markets are currently rather fragile. I do not consider we are in a Bear Market, considering that the US market has recently reached a new high and the UK FTSE overall is doing , though it is down over 1% today. But the markets are more prone to overreact than they used to be, whether it is rumours about Brexit, Trump's latest Tweets and trade wars, etc. Markets generally are affected by rumour and uncertainty rather than fact. Should there eventually be a large correction in the market, having some cash on the sidelines would then come in very useful.
Until you feel ready to invest in individual shares, set up a practise account. You can do this on The Share Centre website (share.com) without any charge. Also, for small holdings, when you do invest with the Share Centre the charges are pretty much less than most other brokers, you would only pay £7.50 per trade on buying/selling a small holding, and if you bought 500 shares in the company itself then your charges then are only £5.25. Even after all these years, I only buy about £250-300 as an initial holding in a company (I expect this admission may make some people on here giggle, as I think some have vast holdings by comparison), and if the company continues to make progress, both in share price and positive trading, then I buy more. Even with such small holdings, if the company is good and the share price demonstrates good momentum then your dealing costs will easily be covered before too long, and with any companies on the AIM market there is no stamp duty to pay either.
Do NOT buy shares in a company after a profit warning. This almost certainly indicates that trading is taking a turn for the worst, and profit warnings usually come 2-3 at a time over a period of a year or so. There are thousands of companies out there that you can buy shares in, quite a few of which are doing very well, so there is no need to buy shares in a company just because they are cheap. There is a reason why they are cheap, and it is generally not a positive one. Companies offering a yield (dividend) of more than 5% are ones that you might wish to be wary of, as it will sometimes (but not always) indicate a degree of negativity... and dividends can easily be chopped if the company starts doing worse, just look at Debenhams!
DON'T buy more shares in a company that you already hold if there is a profit warning, set a stop loss of 10-15% below the highest price it has reached, and if the price dips below it for more than a day then I'd be tempted to generally sell. You can set this kind of thing up easily enough on a spreadsheet, it's a good way to keep an eye on how your investments are doing.
You can use charts to help you make an investment decision. On moneyam.com, for example, you can see what has happened to the price over, say, two years, and you can add the 50 and 200 day moving averages (50 MVA, 200MVA) which give a better picture of the overall trend. If the trend is down, this is generally not good news, some trading strategies are based on momentum and little else, in that shares are sold if the price is drifting and bought if the averages are rising.
I don't agree with early advice of investing £3-4000 in only 2-3 companies, if one of those companies has a profit warning then you will be down quite heavily. You need diversification (covering different companies and industries) so that if one or two do badly then overall you will hopefully still be ahead. So IMHO you need shares in at least 8-10 companies in the medium term, once your funds allow. But you wouldn't, say, buy all house-building companies, because if that sector takes a turn for the worst (it isn't too favourable at the moment) then in practise most of the companies shares would then show a downturn.
I would strongly suggest that you avoid any advice in getting involved in spread betting - this is one of the most risky investments one can possible get involved in, and you can easily lose MORE THAN YOU INVEST! In other words, if you invested £100 you could in theory lose £400-500 without the proper safeguards in place. IMHO, you need to have a lot of knowledge of companies and markets to do well at this, as well as monitor things on a regular basis - a share price can seemingly move conversely to what one might think based on the company's outlook, for no apparent reason.

Good luck, I hope some information in my post is of use to you.

Andrea

JohnEustace

1st Aug '18

As of today the new ESMA regulations protect a non-professional spread better from losing more than they invest.

And you don't have to use leverage. But do read the Naked Trader Guide to Spread Betting before even opening an account.

Gromley

4th Aug '18

"Somewhat" belatedly, I've finally gotten around to answering pka's question 4 over at my Brokefolios thread so I thought I would just flag this in case anyone was looking for an answer here.

It's not really pertinent to the "beginners" theme of this thread, although now I think further; if one is a beginner with factor investing, then maybe attempting to be market neutral initially is not such a bad thing, (so long as you really look at the risks presented by the approach)

pka

4th Aug '18

Thanks very much, Gromley, for posting a comprehensive answer on your Brokefolios thread to my question 4 about shorting stocks via spread betting. That's very useful information for anyone thinking of using spread bets to short stocks with low StockRanks in an attempt to hedge a 'long' portfolio.

Advice on starting out please

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Gregpark

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