When Am I Ready To Invest In Shares?

Yesterday I explained how my first attempt at stockmarket investing was pretty much an unmitigated disaster. Today I’ll cover the way I recovered from this set back and took some positive steps towards investing success.

I realised that my investable funds really weren’t large enough to consider investing in single company shares. I was starting from zero, so if I bought 3 shares they each represented a third of my funds. If something went wrong with one of the companies I was invested in I could lose a quarter of my money very easily, especially as I was investing in small, high-risk companies. I also realised that I simply did not know enough about what I was doing.

Before embarking on any investment, the most important question to ask yourself, in my opinion, is am I ready to invest?

I obviously wasn’t ready, because I could not afford to take much in the way of losses. I had a half baked emergency fund of less than £1,000 that would not do me much good in the event of any sort of emergency, redundancy for example, and I was basically gambling with the little I did have to try and get quick wins in small company shares.

I had started in 2003 to look at collective investments, in particular unit trusts. I did my research and started to save some money each month into a UK fund and a couple of international funds, all wrapped in a mini Stocks ISA.

I also started to build up my ‘Emergency Fund’ in a mini Cash ISA.

Today my emergency fund would cover 3 months expenditure if we both lost our jobs at the same time and about 6 months if one of us lost our job. In reality I should have done this first (before starting the unit trusts) as it has taken a couple of years to get to this level and what would I have done if something went wrong in those two years?

The reason I didn’t sort my emergency fund out first was because:

1. I was overpaid by a few thousand pounds on my mortgage and thought that if push came to shove I could have some of that back; and
2. I was convinced that we were at the start of a strong bull market for shares and I was adamant that I wished to start building my investments.

Over the past 3 years I have managed to build a portfolio of collective investments that are well diversified geographically and that have shown strong growth of around 25% per year. I have branched out into Investment Trusts and feel I have a good base. I could now buy shares in a single company that would only represent a small percentage of my overall portfolio.

I think, if you want to start investing in shares, then you first and foremost need to build your ‘Emergency Fund’ and then only consider single company shares when each one would represent no more than say 5% of your portfolio. I’m sure there will be many people that think this is too cautious, but I feel happy with this approach.