It’s not a surprise that many people worry about investing. Everyday media report on the ups and downs of the markets and how they’re being impacted by major political and economic events. The reports go much higher in the news bulletins when there are major moves in the markets, and particularly when due to such moves ‘billions’ have been wiped off the value of shares.
It’s key to remember that short-term movements in markets rarely matter in the grand scheme of things. While it’s never certain that you’ll get back what you put in, anything other than a dreadfully-timed investment for the long term (at least five years) should achieve a better return than you could get on cash, if history is anything to go by. This is particularly true at a time of low interest rates and runaway inflation.
But there are some common sense rules to bear in mind if you want to maximise your chances of getting healthy returns. Here are ten things to remember when investing;
1. Work out how long you’ll be investing for so you can get your asset mix right. If you are only investing for five years, ensure your portfolio leans more towards lower-risk investments like government and good quality corporate bonds, or so-called ‘defensive’ investments in sectors that tend to do alright regardless of the economic outlook. For an investment timeframe of 20 years or more, consider bigger risks as fluctuations in the stock market are less important and historically they have delivered strong returns.
2. Rebalancing is a tune-up for your portfolio. Everyone should take a look at their portfolio at least once a year. You need to maintain the right blend of assets so you’re taking on the appropriate amount of risk for your goals and investing timeframe. This will change as you get older or reach major milestones. As you approach retirement, back out of riskier investments so that you aren’t hit by market fluctuations just as you’re about to cash your investments.
3. You must have a plan based on why you’re investing and stick to it. Is it for a far-off goal like retirement or your children’s school fees? Once you’ve decided the appropriate assets and strategy needed to achieve your goals, follow the plan unless your life materially changes (marriage and starting a family should probably prompt a re-think).
4. You can’t really ‘time’ the stock market. Otherwise, you’ll commit one of the biggest cardinal sins of investing: buying high and selling low. How else do you explain the fact that the US stock market has returned 8.19% over the past twenty years, yet investors only got returns of 4.67%? Drip-feeding your money into markets each month avoids this risk and allows you to benefit from pound-cost averaging. So when stock markets fall, your monthly investment buys more shares or fund units, or fewer when markets rise.
5. Diversification is the fulcrum of a well-balanced portfolio. It may be tempting to pile into one investment prospect if you think it’ll shoot the lights out, but companies (and even countries) can do unexpected things. For instance, investors in British firm Imagination Technologies could not have easily foreseen that its primary supplier, Apple, would stop using its graphic chips in new iPhones. You would have been seriously exposed to a subsequent plunge in the share price unless you were properly diversified. That’s one reason why collective investments like exchange traded funds (ETFs) are a good idea for the first-time investor.
6. Having said that, do not over-diversify. Studies have shown that having too many holdings results in lower returns and you end up spreading your gains thinly by having too many funds. A one-stop shop which offers you a fully diversified portfolio is a convenient solution.
7. When you sell your winners, don’t obsess about how much more you could have made if you held on for longer. As the saying goes, markets don’t ring a bell when they reach the top.
8. The rest of the market may not be right. Think about stock market bubbles, such as the tech bubble of the late 90s and early noughties. Investors were convinced that high valuations of incipient tech firms would come good, ignoring tried and tested measures of value such as a solid price-to-earnings ratios. If in doubt, refer to underlying metrics and ignore the hype. Likewise, gloomy headlines about political events provoke a nervous reaction among investors, even though the underlying fundamentals of a particular asset or sector haven’t changed. For example, company information reduces over the summer, so media coverage centres on geopolitics. But this might be irrelevant for companies with strong balance sheets or sectors benefitting from long-term demographic and consumer changes.
9. Don’t get too dazzled by star fund managers and their investing tips. Some, like Neil Woodford, are big names for a reason, but even the most experienced investors may get things wrong. That’s why it’s important not to buy into one or two investment narratives, however credible they seem.
10. When a stock or fund is failing, it’s tempting to hold on for far too long in the hope that things will turn around. But a successful investor can recognise when this is a futile hope, cuts their losses as soon as possible and rebalances their portfolio to ensure they can take advantage of more promising opportunities.