Why You Should Start Small When Investing

How to be a Better Investor: Morningstar Investment Management's Dan Kemp says when it comes to saving and investing, it's best to start small if you want to succeed

Holly Black 2 March, 2020 | 10:28AM
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Holly Black: Welcome to the Morningstar Series 'How to be a Better Investor'. I'm Holly Black, with me is Dan Kemp from Morningstar Investment Management. Hello.

Dan Kemp: Hello, Holly.

Black: So, third in our series and we're looking at all the things we do wrong and why we're terrible investors.

Kemp: That's right. There's lots of predictable things we do, which we can change.

Black: Okay. So, what are we going to look at today?

Kemp: Well, one of the things that I constantly come across is where people are trying to change their habits as investors or change their habits generally in life. And of course, we're having this conversation early in the year. So, lots of people have set resolutions. Most of those have already been broken. The others will be broken soon. And that really reflects the fact that we find it very difficult to make change stick. So, that's one of the areas that I think would be useful to cover.

Black: Is that the point that we never just go, oh, I'm going to cut back ever so slightly or tinker with that one thing? It always has to be a lifestyle overhaul, right. I'm going to be a master investor this year and change my entire portfolio when really that doesn't work.

Kemp: No. It doesn't. The more things that we take on, the more it's going to be difficult to make those things stick. And so, often when you're doing a budget for the year ahead, for example, trying to save more and, of course, the core of good investment is first to create the money through savings to be able to invest. But when you start that, then normally people try to do far too much. And so, often a good financial adviser will encourage people just to change one thing, change a small thing, because it's tough enough to change a small thing. You're never going to manage to change a big thing. So, to give you an example from my New Year's resolutions this year, my resolution was that I was going to bring sandwiches every day. It was going to save me a fortune in lunch money, and also a huge amount in calories. And so, this seemed to be a good thing to do this year. First day I made a sandwich…

Black: Yes.

Kemp: …which was great. And then I left it on the side in the kitchen…

Black: No.

Kemp: …because I had a plan to make the sandwich, I didn't have a plan to put it in my bag and take it with me. That seems like a really small thing, but you realise that when you're trying to change things, it's quite complex. There are lots of different steps that you need to overcome. And so, the more things you try and change, the less likely you are to try and make those steps.

Black: So, if someone is looking to start investing or maybe change their portfolio, what are some of the simple, small steps that they can take?

Kemp: Well, if they're looking to start investing, then again, that tends to come from – just from starting saving. And if they're going to do that, then start small and try and automate future savings, because if you try and save 20% of your salary immediately, you'll give up very, very quickly. Whereas if you try and save a very small amount, but then two months’ time, save a bit more, and then two months after that, save a bit more; and if you can find a way of automating that, so those payments increase in the future through an accelerating standing order or something like that, then you'll find that it's much easier to stick to.

And then, if you're setting up a portfolio for the first time, then don't overestimate your ability to take risk, because again, that can lead to problems further down the line. So, you start with something that's very core, not terribly interesting, that is suited to your own risk profile. And then, finally, try not to make too many decisions about the portfolio and the savings, all those things at the same time, try and do things sequentially.

Black: I also think rather than expecting yourself to suddenly read all the books and do this every day, it's almost worth making an appointment in your calendar or your diary 15 minutes a week to work on it, so it becomes ingrained.

Kemp: Well, that's right. So, again, anything that you can establish as a habit is really helpful. Equally, writing things down is very powerful. Once you've made a plan, make sure you write it down. And don't type it, actually write it down. That seems to help a lot of people. So, the more you have written commitments, the more you can plan each different step, and the more you can just aim on – aim to accomplish one thing, the more likely you are to succeed.

Black: So, you're going to go home and write a post it that says remember sandwiches.

Kemp: Remember how to get the sandwiches from the bag. And then there'll be another step that I'll overlook. I'll forget that I brought my sandwiches. There's a lot of complexity in almost everything that we do. And so that's why you’ve got to start small. It makes a big difference.

Black: If you ever forget to eat your lunch, I will help you with that, by the way.

Kemp: Brilliant. I’ll look forward to that.

Black: Thank you. And thanks for joining us.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk


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