If you’re new to investing, knowing where to start can be a daunting
task. The reality is that people should start saving and investing as early as possible. The growth of savings and the power of compounding gives an enormous head start to those who can put money aside and invest in the early stages of their lives and careers – and building an investment portfolio is one proven way to grow capital and wealth.
Every investor needs to ask themselves the same fundamental questions before getting started. It would be best if you clearly understood your investment goals.
What are you trying to achieve? Are you looking for growth, income or both? How
much risk are you willing to take on? You might be investing in having enough money for retirement, which could be decades away. But equally, you could have shorter-term
goals, too, like starting a family or buying a larger home.
Choosing the correct investing strategy
With a clear goal in mind, you can create a realistic plan for achieving your objectives within a specific time frame, choosing a suitable investment strategy matters when shaping your financial plan and a goals-based approach offers a new take on growing wealth.
Goals-based investing focuses on reaching life’s goals versus trying to get high returns on your investment portfolio.
Investors and retirees looking for reassurance during challenging stock market times can take heart in these time-tested investing principles. These six principles can help you build an effective long-term strategy to achieve your financial goals and build financial wealth.
Six principles of investing
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 achieving your investment goals. Investing often is just as important as starting early.
Leaving your planning to the last moment is never a good long term strategy. Having a disciplined approach can help you build more wealth over time. This way, investing remains a priority for you throughout the year – not just around specific deadlines.
You can also ease into any market (rising, falling, flat). You don’t have to worry about finding the perfect time to invest. You can then review your plan regularly with your professional financial adviser and make adjustments when necessary, but staying focused on your goal will help you 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 30 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 performs poorly, others may flourish 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. It is crucial because other financial markets do not move in the same way at the same time. At various points in the market cycle, different types of investments or asset classes – such as cash, fixed income and equities – will lead or lag. For example, they may respond differently to changes in environmental factors: inflation, the outlook for corporate earnings, and changes in interest rates.
When you diversify, you are better positioned to benefit from opportunities across different investments as they emerge.
4. Start investing early if you can
Starting early is one of the best ways to build wealth. Investing for a more extended period is widely considered more effective than waiting until you have a large amount of savings or cash flow to invest. As a general rule, the earlier in life you start investing, the better your chances of long-term growth due to compounding.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pay it”.
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.
5. ‘Activity bias’: the urge to just do something.’
Some investors suffer from what behaviourists call ‘activity bias’: the urge just to 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. We have seen this many times; the recovery tends to be over before you know it.
Markets go through cycles, and it’s essential 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 investor’s needs are different, and while the points above are good general tips, there’s no substitute for a strategy tailored specifically for you. Professional financial advice can help you take the emotion out of investing and provide an objective view in volatile times. It may just be the best investment you ever make.