How to do investment research

When you start investing and you’ve decided to do it yourself by choosing your own investments without professional financial advice, you’ll often see warnings to ‘do your own research’. But what does this mean and where should you begin researching funds and shares?

Why do investment research?

Investments are a big commitment. This isn’t meant to scare you off them. It’s just a reminder that buying an investment is often a big financial commitment – so you should treat it like any other big purchase in your life. It’s all too easy to forget this, especially when you’re just getting started with investing.

Let’s imagine you’re about to place a deal to buy your chosen fund or share. You’ll likely see the warning to ‘do your own research’, but what does this mean? Essentially, it’s reminding you to check the investment is right for you and what you want from it. Because doing these checks can minimise your risk of losing money and helps you feel more confident in your choice.

Here are some of the checks to make before you click ‘buy’ on your chosen investment.

• Is the investment right for your needs and level of risk you’re comfortable with?
• Is the investment credible? For example, is the fund manager regulated and reputable?
• Is it good value? You want to make sure costs won’t eat into your potential returns too much.

How NOT to research investments

Confession time! The very first investment I bought was £100 worth of Burberry shares. Thing is, I spent nearly £10 placing that order (dealing fees plus stamp duty). So straight out the gate I was down 10% and eventually ended up cutting my losses and sold my stake in UK high fashion at a total loss of £20.

Burberry wasn’t necessarily a bad choice but the question is, why did I choose to make that my first investment? Well honestly, it was nearly as simple as ‘I'd heard of it’. I knew it was in the FTSE 100 so a big, trusted company, but let's be honest, I probably just wanted to say I was a "shareholder in Burberry". Some less than savvy decision making went on that day and even less savvy investment research. 

But that was then, and it was fortunately only a £20 lesson in how not to research investments. Since my first misguided step into investing, I've learnt some of the tricks of the trade (pardon the pun) and discovered investment research isn't as burdensome or as boring as you might think.

Know your investment needs

The best place to start with your investment research is yourself. Think carefully about what you’re hoping to achieve by investing and your appetite for risk. We talk about this a little more in our managing your investment risk article, but simply put, you want to make sure the investments you choose match the level of risk you’re comfortable with. Knowing your financial goals and risk appetite can help you target your research and narrow down the investments you’re looking for.

Think about the bigger picture

“Be an investor not a collector” are wise words from Ryan Hughes, investment director at AJ Bell, spoken at his 'how to research funds' webinar. What he means is you should always zoom out on an investment you’re considering and figure out its place in your wider portfolio. Does it balance well with other investments you hold – or plan to hold? And if it doesn’t or it means you’ll be too exposed to one investment type or area, maybe you need to keep looking. Remember, the key to a successful portfolio is diversification.

Researching stocks

Bearing in mind your needs and having an aim of a well-diversified portfolio, you can start your investment research. Researching stocks and shares can be a little more labour intensive than researching funds. But if you’re comfortable with the higher risk of investing in shares, there’s lots of tools out there, like AJ Bell’s share screener, to help you find the right companies for you.

Once you’ve narrowed down your search, dig a little deeper. Look into the stock’s performance history, the company’s latest news and what financial pundits are saying. And check its current price represents good value for money through available information like its price-to-earnings ratio. It’s also worth noting if the company has previously paid out income in the form of dividends – and whether that’s something you’re looking for.

All of these checks only scratch the surface of the research you could do into the shares you buy. And here at Money Matters, we’re big believers in the easy investing life. So, if the thought of this amount of research and picking out individual stocks makes you squirm, researching and investing in funds may be the answer.

Researching funds

Funds are ready-made collections of investments, either actively managed by someone called a fund manager or set up so they track the performance of a certain market or sector. Actively managed funds aim to beat the market and are usually more expensive to invest in.

All funds come packaged with the information you should need to decide whether or not to invest in them, including their costs. This information is usually available on their key information document and fund factsheet. You’ll usually find both documents on your investment platform’s information page for the fund.

But how do you narrow down the choice of funds out there? And how many funds should you choose?

For the first question, favourite fund lists can massively help you out here. These lists are chosen and monitored by investment experts and include funds which are at the top of their game in different sectors, regions and styles of investing. And when thinking about how many funds you’ll need, it depends on what funds you’re picking, remembering that overall aim of a diversified portfolio. Laura talks you through how many funds to hold in an earlier article.

 Explore AJ Bell’s Favourite funds

Investment research in a nutshell

Investment research is important but it shouldn’t put you off investing. There are plenty of tools, guidance and ready-made options out there to help you make the best investment decisions for you. Just don’t get carried away in the moment – and don’t invest £100 in Burberry because you liked the sound of it! (Not advice, just lived experience.)