Want to start investing? 3 questions to ask first

It’s incredibly simple to start investing today. A few clicks on a smartphone and you’re away.

However, this blessing can turn into a curse without preparation. Here are three questions that are worth thinking about when starting out.

1. Are my finances sorted?

One mistake some eager newbie investors make is investing every spare penny into the stock market.

This becomes problematic when a crisis hits. For example, the car engine might break, necessitating a replacement and immediate Â£3,000 outlay (or more!).

In this situation, someone might be forced to sell their shares to raise cash. Potentially at a loss.

So, I think it’s important to ask: are my finances in order? The best situation is to have most or all debt paid off (barring a mortgage, of course). Then to also have a rainy day fund put aside for emergencies.

From this solid foundation, it’s possible to invest with a truly long-term mindset.

2. What are my goals (really)?

This long-term approach is vital because the stock market isn’t a get-rich scheme. Global equities have returned about 10% per year long term. But that’s an average, not a guranteed annual return.

Of course, it’s possible to do much better than this, and vice versa. However, the point here is that stocks are small pieces of real-world businesses, not lottery tickets.

I think it’s worth asking then: why am I in this? If the answer is to get rich quickly, then there are more suitable avenues to explore than the stock market.

For example, my best friend used to be interested in the stock market two decades ago. However, after a year or so, he worked out that it would take him another 20 years investing Â£1,000 a month to get to Â£1m (with a 12% return).

He wanted to get there quicker so he pursued a different — and ultimately successful — path. Everyone has different goals.

3. Assessing risk

Finally, it’s worth asking how much risk one wants to take on. Again, only each individual person can answer that.

Buying individual shares can lead to fabulous returns. Just ask long-term Nvidia, Microsoft, or Tesla shareholders.

But they can be dicier because you’re taking on company-specific risks. And some of these are almost impossible to know in advance.

For example, WH Smith stock fell 42% in a single day earlier this month when it revealed an accounting irregularity. Ouch.

Safety in numbers

Don’t like the sound of that? Then perhaps iShares UK Dividend UCITS ETF (LSE:IUKD) would be more suitable.

This exchange-traded fund (ETF) holds 50 UK stocks with high dividend yields, including British American Tobacco, Legal & General, HSBC, BP, and Aviva. All these are from the blue-chip FTSE 100 index.

From the FTSE 250, it has the likes of ITV and housebuilder Persimmon. It holds a few housebuilders, so the share price might get a bit of a lift if these stocks recover strongly as interest rates keep falling

This ETF isn’t perfect. It’s only focused on dividend stocks from a single market, and this could fall out of favour with investors at any point. So it should only be considered as part of a wider, more diversified portfolio.

However, with the ETF yielding a handy 5.1%, I think it’s worth a look for more risk-minded investors.

The post Want to start investing? 3 questions to ask first appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of Motley Fool Money. Ben McPoland has positions in Aviva Plc, HSBC Holdings, Legal & General Group Plc, and Nvidia. The Motley Fool UK has recommended British American Tobacco P.l.c., HSBC Holdings, ITV, Microsoft, Nvidia, Tesla, and WH Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.