Five principles of investing everyone should know
Written by Stuart Craig, Chartered Financial Planner at Pareto Financial Planning.
Are your investments working as hard as they could be? With so many options out there, it can be confusing. We can help you navigate your options and provide a personalised recommendation based on your investment goals.
The following five principles will help you get on top of some key issues that affect everyone who invests their money.
1. SET INVESTMENT GOALS
Successful investing begins by setting measurable and attainable investment goals and developing a plan for reaching those goals. Keeping your plan on track also means evaluating the progress on a regular, ongoing basis.
Whatever your personal investment goals may be it is important to consider your time horizon at the outset. As this can impact the type of investments you consider, to help achieve your goals.
Committing to investment goals will put you on the path to building further wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.
2. INVEST AS SOON AS POSSIBLE
It’s easy to say that it is better to invest early, but why? The benefits of investing early are numerous and should not be overlooked. However, the benefits that come with starting your investment portfolio as soon as possible, will also depend on your attitude towards investment risk and how patient you can be. It is no secret that the well-known proverb ‘time is money’ could not ring truer in today’s society.
You might be inclined to ask yourself the following questions: ‘Why bother investing early?’ ‘What difference does it make?’ and ‘Why should I invest now instead of next year or beyond?’. The answer is that time allows you to take more calculated risks.
If you invest early and incur a loss, you have more time to make up for the loss on investment. Whereas an investor who starts investing at a later stage in life will get less time to recover any losses. Thus, with early investments, your investment has the opportunity of more time to grow in value.
Not only is time your best friend when you’re investing, but you may also reap the benefits of something called ‘compounding’. To paraphrase Ben Franklin: Your money makes money. And then you make more money on the money your money makes. The longer your money can benefit from the power of compounding, the bigger your gains can potentially be as time goes on.
However it is important to note that no matter how long your money stay invested, there are no guarantees you will get back the amount you first put in as markets go up and down.
3. INVEST REGULAR AMOUNTS
By investing regularly, you benefit from highs and lows in the market – called ‘pound cost averaging’ – and this can help cut down the risk of investing when the market is high. Dips in the market, particularly in the early years, could even work to your advantage provided you have committed to investing for a lengthy period.
If your chosen investments have become cheaper to accumulate it means your investment buys more shares or units to keep for the long term. By investing regular monthly amounts, rather than a larger lump sum in one go, you end up buying more shares or units when prices become cheaper and fewer when they become more expensive.
Although it might sound quite technical, it essentially means adding money on a regular basis into your investment. This is an effective way to invest because if you keep buying when the market falls you could, over time, turn volatility to your advantage.
4. DIVERSIFY YOUR PORTFOLIO
Diversification is spreading investment risk, the goal being to increase your odds of investment success. Your investment portfolio risk tolerance can be split across different types of investment, so your money is less likely to be affected by any single event or economic development.
Diversification is important in investing because markets can be volatile and unpredictable. While individual asset classes can suffer declines, it’s very rare that any two or three assets with very different sources of risk and return. While individual asset classes can suffer declines, it’s rare that any two or three assets with very different sources of risk and return, for example government bonds, gold and equities, would experience similar declines at the same time.
It is important to make investment decisions and portfolio allocations based on personal circumstances and goals. Accordingly, asset allocations in a portfolio should not only be guided by your risk tolerance and its ability to guard against market volatility, but also by the stage of life you are at.
5: RESIST THE URGE TO PANIC SELL
What this means is that your ability to cope with short-term volatility in your investments is just as important as the choices you make at the outset of your investment journey. 'But if there is a stock market correction, it is important to resist the urge to sell up immediately and instead sit tight and ride out any downward movement before looking for opportunities to exploit if they arise later.
The fear of incurring major losses could make it extremely tempting to sell your investments. Yet while this may temporarily alleviate your nerves, doing so could put a significant dent in your long-term gains. Investment trends show that leaving your money invested increases the chances of it growing and building your wealth pot.
If you invest for the long term, any short-term volatility shouldn’t affect your ability to reach your investment goals over time. Keep calm and carry on building up your investments. History has shown that over long enough time periods, no matter what challenges the global economy has faced, markets recover from significant downturns.
VALUABLE ADVICE, TAILORED TO YOU
We believe in helping you plan for the life you want rather than letting the future take you by surprise. We want to give you access to our financial and investment expertise, to help give you the chance to choose what your financial future looks like.
For more information or to discuss any of the issues raised in this article, please contact your adviser, or call Pareto directly on 0161 819 1131. Further information can also be found at gov.uk.
The content in this article is for your general information and use only and is not intended to address your particular requirements.
Personal circumstances differ and not all of this information is applicable to every client and/or their business and should not be relied upon without seeking specific professional financial advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. All references to taxes and the allowances and reliefs are those available to UK tax payers. The information in this document is therefore intended only for UK tax payers. The information provided is an overview of our understanding of the tax rules and guidance in place at the time of publication. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results. The Financial Conduct Authority does not regulate Tax Advice, Estate Planning or Will Writing.
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