If you look at the data, over the past 20-years, if you have invested in the broad market portfolio on the last trading day of every month, you would have realized an annual percentage yield of 10%. In simple English, an investment of N100 thousand on the last day of every month in the last 20-years would have grown to N64.6 million (total amount invested over the 20-year period would have been N24 million). Now that is not taking into account dividend and bonus shares you would have earned over the period.
Even with inflation and the weakness of the Naira, that’s a handsome profit.
But in spite of this, most millennials and gen-Xers are missing out on this opportunity by staying out of the stock market. Below we share a few quick steps to get you started if you’ve never invested in shares before:
Eliminate High Interest Debt: The first thing to do is eliminate high interest consumer debt. The question always arises, which should I do first, pay off debt or invest and the answer is it depends. If the stock market has an annual percentage yield of 10%, then you want to eliminate any debt for which you pay more than 10% per annum. That said, you need not wait until you have fully paid down all your debt before you start investing, but it should be priority. Read our earlier post Keep an eye on your debt for more.
Build an Emergency Fund: Once you have your debt sorted, you should go on to put some money aside to cover at least six months’ worth of expenses in an emergency fund. The reason is simple you don’t want to be forced to sell you shares in a down market just because you are temporarily out of work or facing an emergency. It would also help avoid taking on new debt when faced with such situations. Read our earlier post Build your Emergency Savings for more.
Learn about your options: While you are sorting out your debt and building up your emergency fund, you should spend some time to educate yourself on the different investment options, understand basic concepts and terminologies. Getting a lay of the land will be helpful on this journey.
Open a brokerage account: Now, with basic knowledge of investing, you should proceed to find a stockbroker and open a brokerage account with the Central Securities Clearing System Plc. (CSCS). With this account, you are able to buy and sell securities.
Fund your brokerage account: To be clear, if you’ll need access to your funds within the next five years, then you should forget about putting it in the stock market. The money market (treasury bills and fixed deposit accounts) should suffice for you in the interim. If investing is good for you, then you should aim for ‘automatic investing’ i.e. determine an amount you would be able to invest on a monthly basis and setup a direct debit to your brokers account. Read our earlier post Consider your time horizon for more.
Discover great businesses: If you chose one of the large brokerage firms you would have been added to their research mailing list and should soon start getting research reports and weekly stock recommendations. While these reports are done by paid analysts, you might get lucky and you might also get burned as these reports aren’t always unbiased opinions. But as a DIY investor, finding a great business is could be as easy as keeping your eyes open while you walk through your local supermarket and looking out for the products that are doing well. Thing is behind every successful product, there’s likely to be a publicly traded company cashing in on that success that you can invest in. Read our earlier posts Finding valuable shares to invest in and Picking which shares to buy for more
Buy your first stock: At this point you should be able to take the plunge. However, take care to avoid a rush of blood to head and throw all your money into the market in one go. You want to dip one foot first. We recommend you buy a few thousand Naira worth of stock in your favorite company. This first investment will help you get hands on experience of how the process of placing an order works. Also, as you follow the stocks daily movements you get to know more about yourself as an investor and your reactions to those price movements. Read our earlier posts Placing an order and How much should I start with? for more.
Build your portfolio: No matter how great you think your favorite company is, you cannot just invest in that one business. Anything could go wrong. As such, you want to have a diversified portfolio with stocks in different companies and sectors. At this point, there are several ways to go but for first time investors we recommend something simple that works – indexing. This works by just buying the shares that make up the market index. For instance, in Nigeria we have the ‘NSE 30 Index’ – which tracks the top 30 companies in terms of market capitalization and liquidity. Clearly, you can’t go buying shares in all 30 companies, so you should filter them down to the top 5, 10 or 15 depending on the size of your portfolio. Read our earlier post Spread your investments for more.
Keep investing on a regular basis: Once you have your portfolio in place, you want to start growing the total value of the portfolio. This can be done by funding your brokerage account with an amount you can afford on a monthly basis and then buying up additional shares in each company in your portfolio. This regular monthly investments will help you normalize your portfolio return for the ups and downs of the market. Read our earlier post Build your Portfolio with Regular Investing for more.
Monitor your investments: Now that you have taken the plunge and well on your way with your investment in the stock market, you need to monitor your stocks and assess their performance from time to time. While at this, you must avoid the urge to sell because of a dip in the stock price. It’s important to note that this is a long-term game, so no need to obsess – checking in every day. Once a month is a good idea. This is basically for you to look out for any new information that could impact on your portfolio. Read our earlier post Monitor Your Investments for more.