Updated 03 December 2020
Everyone hopes to save if they can, but not so many of us feel ready to invest. You may think investment seems a bit too close to gambling to be worth the risk. However, if you go about it in the right way, investing doesn’t have to be a scary prospect.
The popular perception is that saving money is the ‘safe’ option and investing is the risky one. That’s true to an extent. But when you factor in inflation, you realise that a lot of savings actually lose value or stay static over time, because they just can’t keep up. If you’d rather have a go at beating inflation, then investing generally gives you the best chance overall. So where do you start? No tips can guarantee success, but these might help.
Silly question maybe, but why are you doing this? Remember that a ‘strategy’ is a means to an end – so you need to decide what end result you want. Are you investing to build up a lump sum to spend five years from now, or ten years? Or do you want your investment to generate a regular income (in retirement, for instance)? Different goals require very different kinds of investing, so make sure you match your objectives to your methods.
If you’re planning to invest in a particular kind of stock (as opposed to a more general fund) then look for an ‘edge’ if you have one. For instance, if you’ve spent your life working in the technology sector, then you may have a feel for tech companies and know a good prospect when you see one. It’s still a high-risk strategy to invest in individual companies, but if you really know your field and are prepared to take the chance, any expertise you can bring is an advantage. On the other hand, don’t plunge into a sector you don’t understand just because it looks hot at the moment.
‘What??’ you say. Hear us out. The true amateur has a big advantage – because the word ‘amateur’ actually means, ‘someone who does something for the love of it’. To maximise your chances of investment success, you really need to love what you’re doing. Read up on investing, study the experts, make it your hobby – try and enjoy the adventure for its own sake. This creates double benefits: not only does it increase your chances of making good choices, but it’ll also mean that investing becomes part of your discretionary spending, so you won’t feel so much like you’re making sacrifices.
Otherwise known as the waiting game. The long-term nature of most investing is perhaps the hardest lesson for beginners to learn. True, equities can make significant short-term gains, but they can also plunge in value even faster. To become a serious investor is to accept this risk, and find a way to work with it. So start early, set out your goals, don’t be impatient – and don’t panic. Remember that the stock market has outperformed cash over every 20-year period since 1926.
Charles Darwin recognised that creatures which were over-specialised were prime candidates for extinction. The same is true of investment strategies. You should always aim for a diverse portfolio – and by diverse we don’t just mean shares in different kinds of companies, but many different kinds of assets altogether: equities, bonds and cash are the three main categories (commodities are also an option). The idea is that when one asset class is struggling, another will be growing or at least holding steady. The proportion in which you hold different asset classes is a topic in itself – this is the tactical heart of your investment strategy, determining how fast (or how securely) your portfolio may grow.
If you are managing your own investments, then this is a very easy point to overlook. However, it is a crucial one. Consider your diverse portfolio from tip 5 above – probably a blend of high and medium risk equities, bonds and cash. You chose the mix carefully, based on how much risk you wanted to take (based on your overall goal – see tip 1). But what if the equities have a very good period of growth? Then more of your money is in a higher-risk investment, so your mixture has changed from your original plan. This may make it unsuitable for your goal. This is why you should check your portfolio regularly (e.g. quarterly) and move assets around if necessary to keep the mixture right. Find out how a wealth manager can help with your investments.
You know how sometimes an expert investor makes a market prediction and turns out to be spot-on? You never hear about the fifty other experts whose predictions failed to materialise. Stock markets are chaotic systems, like the weather – you can’t predict them, but you can prepare for them. Try to make your portfolio an all-weather vehicle that can survive the storms and then enjoy the sunshine. If you trust in timing too often, sooner or later you’ll mistime it and get burnt (or drenched).
Once you get involved in it, investing can be as emotive and compelling as following a sports team. This can have its advantages (see tip 3) but may also lead to irrational snap decisions, such as bailing out of a chosen fund during a bad spell, thus crystallising your losses. The best way to keep your emotions in check is to invest with the help of an IFA, one who specialises in wealth management. Your adviser will give you as much or as little involvement as you wish, and you can run possible decision past them to check their soundness. An adviser won’t overrule you, but they will spot risks and opportunities that you may have missed.
To find out more about starting to invest, find your nearest adviser using our smart search. If you already have investments and want to know if they could do better, you can book a free investments check with an IFA here.
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