Global stock markets recently hit levels not seen since the dotcom boom of 2000, then tumbled after a dramatic sell-off in Tokyo. What should investors do? Pick up some bargains marked down in the sell-off? Or junk their investments ahead of a major crash? We show you how to be a DIY investor in five easy steps:
Step 1 Get informed
Despite the falls in Tokyo and smaller falls in London and New York, it is remarkable how much some shares have risen over the past year. EasyJet is up 165% and Lloyds 131%, although the worst-performing companies in the index, Eurasian Natural Resources and Evraz, are down 43% and 53%.
Of the 2,000 unit trusts available to small investors, Japanese ones, even after Thurday's falls, have performed best, followed by formerly bombed-out funds in Europe. For example, Artemis's European Growth fund is up 54% over the past year, while Legg Mason's Japan fund has risen by 110%. Among investment trusts it is a similar story, and not just in Europe and Japan. For example, Henderson's UK Smaller Companies investment trust has jumped 66% over the past year. Even the average fund invested in UK shares is ahead 34% over the year.
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Scores of websites will help you make decisions about investments. The Financial Conduct Authority, which replaced the Financial Services Authority, has a vast array of consumer information on investments, how to shop around, and your rights, although it won't give advice on where to invest.
To research shares, one of the easiest sites to use is Yahoo Finance at uk.finance.yahoo.com. Stockbrokers also have sites promising to hold your hand through the share-buying process, such as Hargreaves Lansdown (hl.co.uk), the Barclays Investor Zone (barclays.co.uk) and Halifax Share Dealing (halifax.co.uk). Or click on Guardian.co.uk/money where you can find factsheets on investing, live share prices and regularly updated news, plus the best free news archive online.
To find out about funds, take a look at trustnet.com, which hosts free data on the performance of thousands of unit trusts and investment trusts.
More experienced investors may want to try citywire.co.uk, a good‑quality, well-resourced news site for the more professional investor, providing updates on share prices, fund performance, top fund managers, directors' dealings, news archives and so forth.
Or you can talk to like-minded people keen to start investing. As book clubs do for literature, investment clubs bring together people with an interest in investing. Try proshareclubs.co.uk for information on clubs in your area. But don't be tempted by "free" investment seminars promising easy money from stock markets. You'll be pushed into paying thousands of pounds for information you can find free elsewhere on the web.
Step 2 Choosing an investment
Investing is about taking risk, but reducing that risk by spreading your money around and allocating your cash sensibly. So where do you start?
• How much can you afford to invest? Be realistic – it's better to pay down debts first, or perhaps pay into your company's pension scheme if the company also contributes. Do you have a lump sum to invest, or are you going to invest every month? Many experts say it is better to drip-feed your money into shares and funds over the long term, to help iron out the rough and smooth periods.
• What's your timeframe? If you're under 50 and saving for a pension, then it's sensible to take higher risks and invest knowing you won't need the money for 10 years. If you're saving for a mortgage deposit in a couple of years, then don't put your cash in just a few shares that might be plummeting when you need to cash in.
• Diversify your investments. Mix and match some blue-chip shares in big, safer companies with smaller investments in riskier, but potentially higher growth, smaller ones. Put money into emerging markets – but not everything.
Japan was the laggard of the last two decades but even after the falls late this week has been the strongest market of the last 12 months. If you had a small allocation in Japan, at least you'd be enjoying some of that gain. Meanwhile the Shanghai market is below where it was a year ago - so may be a better bet for the year ahead.
• Consider ethical funds. Of the big ones, Standard Life Investments' European Ethical fund has notched up a gain of 44.3% over the last 12 months, while over three years its UK Ethical fund has returned 75%.
Step 3 How to buy and sell
To buy or sell shares, there are dozens of online "execution only" brokers with relatively low charges.
Expect to pay commission and a possible annual fee for holding the shares for you (called custody), with charges dependent on how frequently you trade. Halifax Share Dealing, Saga (provided by Barclays) and Hargreaves Lansdown all charge £11.95 per trade. They claim you can open an account and start trading within minutes, once you've made a minimum initial deposit.
To buy or sell funds, your best bet is the investment "platforms" that allow you to buy, sell and manage all your investments – including Isas and self-invested personal pensions (Sipps) – in one place online.
The biggies here are Alliance Trust's i.nvest platform, Hargreaves' Vantage and Fidelity's fund supermarket (which sells a wide range of funds, not just Fidelity's). These are not just platforms for buying – for example, Fidelity offers lots of guided portfolios and "expert picks" for the novice investor.
Step 4 Keep the charges low
It's easy to waste money on unnecessary charges. The number one rule is: avoid the daft "initial fee", which can be up to 5.5% of the sum you are investing.
If you put £5,000 in, say, the UK's biggest fund, Invesco Perpetual High Income, then £250 will go out the door in initial charges, plus another 1.5% of the value of the fund every year in annual management charges.
The fund platforms named above will discount most initial fees to zero and there are discount broker sites such as chelseafs.co.uk and bestinvest.co.uk that offer funds cheaply. Cavendish Online is probably the cheapest place to buy, as it gives a rebate of not just the initial charge but also part of the annual charge as well.
Generally, buying direct from a fund management company is a bad idea, as you will have to pay the hefty initial charges, but some are offering DIY investors better deals. Fundsmith.co.uk, sells its top-performing global equity fund to small investors for a 1% charge.
Step 5 Monitor and move
You should think of investments in shares and funds as long-term and avoid trading regularly, as your returns will be eaten up with charges. But use the huge variety of online tools to keep an eye on your portfolio. Many will allow you to switch from one fund to another for a charge of around 0.25%.
