The art of shrewd investment may take many years to learn. If you speak to even the most experienced investment experts, they will tell you that they learn something new almost every day about markets, even after decades of making healthy returns. Successful investing is not something which is done by following a set list of hard and fast rules; each person’s strategy will differ from the next.
Nonetheless, there are a set of seven general principles that you should pay heed to when devising an investment strategy. In this post, we will outline these principles and explain why you should incorporate them into your decision-making process.
Review Your Investment Goals
The place to start when investing is to think about your reasons for investing in the first place and what you want to achieve in the long and short term.
Completing a money fact find is the best way to take stock of your current financial situation. The results will play a key role in determining realistic goals and your appetite for risk.
Set an Investment Time frame
The period of time that you plan to hold an investment will depend on your reasons for investing. From the outset, you need to think very carefully about setting a date by which you hope to hit a certain profit figure and what is your investment objective.
An investment time frame is important as it will dictate the level of risk that you will be willing to assume. For instance, saving for a house deposit with the aim of buying in two or three years will mean more volatile investments such as shares or funds will not be suitable. In such cases, it is better to put your money into cash savings accounts like ISAs.
For people who are building a retirement fund to be redeemed in 20-30 years, it may pay better dividends to take a few more risks. Investing in stocks and shares may improve your chances of beating inflation and reaching your pension goal.
Devise an Investment Plan
The next after you have assessed your needs, goals and desired level of risk is to draw up an investment plan.
The process of making a plan will aid you in identifying the investment options and financial products that best suit you.
Most personal investment advisors will recommend starting with low-risk investments such as cash ISAs at first. These can then be supplemented with medium-risk investments like unit trusts which include higher volatility but offer greater potential returns.
Higher-risk investments should only be considered once a portfolio of solid low and medium-risk investments has been built up. However, ensure that you only invest sums that you are prepared to lose on these high-risk investments.
As every investor knows, the higher the level of risk, the more chance you have of worthwhile profits. Nonetheless, assuming too much risk will likely not result in the kinds of returns that you are looking for unless you are extremely lucky.
Spreading your money across different investment types and sectors whose price fluctuations are not linked to each other can be an important strategy for achieving a balance between risk and return.
Diversification can help to stabilize returns and promote steady growth, reducing the overall risk in your portfolio.
Decide How Active You Want to Be
Deciding how hands-on you want to be with your investment will depend on your experiences and preferences.
If you enjoy making investment decisions and prefer the hands-on approach, you may want to identify stocks and shares to buy yourself.
However, if you have little experience or time to dedicate to research and market analysis, it may be more prudent to put your capital into investment funds, such as Open-Ended Investment Companies (OEICs) and unit trusts. Doing so will mean that your investment is managed by experts with history and experience of bringing in returns from a wide spread of investments.
Pay Attention to Charges
Investing in individual shares requires the use of a stock brokering service which will involve a commitment to pay dealing charges.
Financial advice is not free, and if you decide on investment funds, you will also be subject to charges that contribute to the operation of the company.
When looking at stockbrokers, investment funds or advisers, it is important to realize that the charges you will be subject to can vary from one firm to another.
Making sure that you are getting a good deal on charges can sometimes require you to cast your eye over a charge breakdown sheet. Although higher charges sometimes correspond with better services, you should always continually assess whether the amount you are being charged is reasonable compared to the charges incurred for services elsewhere.
Review Investments but Do Not Obsess
With any investment, it is important that you periodically review how they are progressing (every 6-12 months is the ideal time). This can be done through a meeting with a financial advisor or by checking investment reports.
Reviewing at regular, pre-arranged intervals will help you to avoid the temptation to act every time prices move in an unexpected direction. One of the biggest mistakes that inexperienced investors make is to sell when they get spooked by routine market fluctuations. This anxiety often causes losses which result from selling low and then being forced to buy back high.
It is common knowledge that investors who obsess over daily price movements tend to buy and sell too often. This results in poorer returns than those gained by investors who leave their money to grow for the long term.
A person’s investment strategy will depend largely on their goals, financial situation and investment time frame. While there is no “right” way of going about making investments, the tips listed above are generally applicable to most investors.