Six principles of investing
Investing your money and avoiding costly mistakes
1. Have a strategy and stick to it
It is one thing to have a target, but a sound investment strategy can make the difference between simply hoping for the best and actually achieving your investment goals. You can review your plan regularly with your professional financial adviser and make adjustments when necessary, but staying focused on your plan will help you to not be distracted by short-term market uncertainty.
2. Think twice before putting all of your money in cash
Putting all of your money in cash can seem appealing as a safe and secure option – but inflation is likely to eat away at your savings as we have started to see recently, with UK inflation rising to its highest level in over 40 years. Add to this rising energy costs that could worsen any inflationary shock and sap economic growth. For most people with longer-term investment plans, cash needs to be supplemented with investment in other asset classes that can beat the perils of inflation and offer better capital growth potential.
3. Diversify and always consider your investments as a whole
When markets are fluctuating, it’s all too easy to worry about the performance of certain investments while forgetting about the bigger picture. But when one asset class is performing poorly, others may be flourishing in the same market conditions. A diversified portfolio, including a range of different assets, can help to iron out the ups and downs and avoid exposing your portfolio to undue risk.
4. Start investing early if you can
As a general rule, the earlier in life you start investing, the better your chances of long-term growth. Compound growth (the ability to grow an investment by reinvesting the earnings) is a powerful force but it takes time to deliver. The right time to invest is when you and your financial adviser have formulated a clear financial plan that requires growth.
5. ‘Activity bias’: the urge to ‘just do something’
Some investors suffer from what behaviourists call ‘activity bias’: the urge to ‘just do something’ in a crisis, whether the action will be helpful or not. When investments are falling in value, it can be tempting to abandon your plans and sell them – but this can be damaging because you won’t be able to benefit from any recovery in prices. Markets go through cycles, and it’s important to accept that there will be good and bad years. Short-term dips in the market tend to be smoothed out over the long term, increasing the potential for healthy returns.
6. No substitute for a strategy that’s tailored specifically for you
Every single investor’s needs are different and, while the points above are good general tips, there’s no substitute for a strategy that’s tailored specifically for you. What’s more, in volatile times, professional financial advice can help you take the emotion out of investing and provide an objective view. It may just be the best investment you ever make.