Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
GameStop mania made me look at shares. How can I invest sensibly?
This is the latest part in a regular series in which we will provide an investment clinic based on hypothetical scenarios. By doing so we aim to provide some insights which can help different types of investor from beginners all the way up to experienced market participants.
Having been drawn in by the hype around GameStop, 30-year old sales executive Joe wants to put some of the money he’s saved in lockdown into the stock market and watch it grow.
Joe’s heard all about bitcoin and knows a few people who have made big money from it. But he’s spooked by the horror stories he’s read online of other people losing cash after investing in the cryptocurrency, so he’s decided he wants to stick to the stock market and not invest in anything he thinks might be too risky.
Joe’s savvy enough to know stocks can go up and down. After looking at the wild swings in the share price of Texas computer games seller GameStop after the firm was targeted by a group of investors on the Reddit social media platform, he wonders whether putting the £1,000 he’s saved in lockdown into its shares is really a good idea.
oe could do a lot worse than heed recent guidance from City regulator the Financial Conduct Authority, which says any would-be investor should always ask themselves the following questions before getting started:
Am I comfortable with the level of risk?
Do I fully understand the investment being offered to me?
Am I protected if things go wrong?
Are my investments regulated?
Should I get financial advice?
INVESTMENT COMMUNITY ON SOCIAL MEDIA
He’s looked on Twitter to see what people are saying about stocks and also follows a couple of YouTube channels about investing that people on Reddit recommended, as well as some investment fans on TikTok.
In the past few months his WhatsApp groups have also been pinging constantly with his mates talking about the ‘mad money’ they’ve made from stocks. He feels like any time he’s seen someone talk about a stock and put a rocket emoji next to it, next thing you know it’s gone up and made some big gains.
One of his favourite YouTubers recently, Fat$tack$$$, was showing off his new Rolex after making a mint in Tesla shares. Fat$tack$$$ also talked about his three no-brainer stocks that will make you rich in 2021 with zero effort, but Joe had never heard of them.
Joe likes Tesla though and thinks electric vehicles are going to be the future of transport. He wants to put his money in stocks where the future opportunity for growth is clear.
Joe has also read the finance section of the newspapers a few times to see what they say about investing, but he doesn’t understand why they keep suggesting things like investment funds and tell you to reasonably expect a 5% return from your investments each year.
He knows loads of people who have made way more than 5% after investing in stocks like Tesla, Apple and Amazon. In Joe’s view, why choose some ‘fuddy duddy’ fund investing in boring old companies nobody’s heard of, when stocks like Tesla are returning a lot more? Joe’s got time on his hands and is happy to keep his money invested for the next 10 years as technology develops and the world around him changes.
CHANNELING ENTHUSIASM INTO THE RIGHT AREAS
It is great Joe is thinking about investing, and understands the risks of shares going down as well as up in value. But it’s important he channels his enthusiasm for investing into the right areas.
To start with, Joe should be wary about getting investment ideas from the people he follows on YouTube and TikTok, who most likely are not regulated to give financial advice and often fail to explain the risks about the stocks they mention. Past performance is not a guide to future returns, and that’s particularly true after a stock has already doubled or more.
People in their early-30s like Joe are not alone in the investing world, and research from online trading platform Saxo Markets reveals a 12.5% drop in the average age of new investors in the UK at the beginning of 2021, with the average man taking up investing aged 35 and the average woman aged 38.
What Joe wants is growth stocks, and typically those involved in technological change. A possible route for him to invest would be to open a Stocks and Shares ISA and put a decent chunk of his £1,000 into a fund, or funds, which invests in a basket of relevant stocks and which provide important diversification in case one or two underlying investments go wrong.
One option could be Scottish Mortgage (SMT), an investment trust run by Baillie Gifford, a fund management company which invests almost exclusively in growth stocks.
Scottish Mortgage has many names which would appeal to
an investor like Joe who wants to invest in technology companies and is willing to keep his money invested for the next five-to-10 years.
Stocks in Scottish Mortgage’s portfolio include Tesla and Amazon, as well as fast growing e-commerce platforms Meituan Dianping and Mercado Libre, which commentators have suggested are the Chinese and Latin American equivalents of Amazon respectively, as well as early-stage companies which are not yet listed on the stock market.
Another option for Joe if he’s looking for potentially fast growth and is prepared for the risks that come with that, is an exchange-traded fund (ETF) which follows the tech-heavy Nasdaq index.
Constituents on the Nasdaq include many big names Joe is likely to know including Apple, Amazon and Google owner Alphabet. There would be some overlap with Scottish Mortgage given the amount of technology names in the index, but it would also be sufficiently different to provide exposure to other stocks that have the potential for growth.
Given the efficiency of large cap US stock markets, paying for an actively managed fund may not generate sufficiently outsized returns compared to the extra fees they charge, so buying a cheaper ETF which tracks the index and replicates its returns could be the way to go.
One example is iShares Nasdaq 100 GBP (CNX1), which provides exposure to the top 100 companies in the Nasdaq index and includes the likes of Facebook and Microsoft. It has a relatively cheap annual cost of 0.33% a year.
If Joe sees a stock like Tesla that he thinks is exciting, it would be fine for him to allocate some of his portfolio to the stock, but he needs to be aware of the risks that the share price could fall as well as rise and that he may not get back all the money he invested.
It is also important he doesn’t put all of his savings into just one share. Diversification is important to provide protection to his savings in case something goes wrong.
DISCLAIMER. This article is based on a fictional situation to provide an example of how someone might approach investing. It is not a personal recommendation. It is important to do your research and understand the risks before investing.