With so much in the press about investing, as well as lots of conflicting opinions and information, it’s hard to separate fact from fiction, or even wishful thinking. I have therefore put together a simple guide of seven practical tips that are both logical and easy to follow.
1. Save as much as you can, as early as you can
The earlier you start saving, the easier it will be. Compound growth and interest over time really makes a difference to how much you end up with. Being in your twenties is not too young to start and if you leave it until your forties or fifties you will have to set aside much more to accrue the same amount.
We all need to strike a balance between living now and planning for the future but starting early, even for modest amount is very worthwhile.
2. Is cash as safe as it seems?
Whilst you won’t get any nasty surprises if your money is in cash you won’t get much in the way of a return either. With interest rates as low as they are the effect of inflation means that the real value of cash diminishes.
It is smart to keep an emergency fund but if you want to make money over the long term you shouldn’t be recklessly cautious by keeping too much money in cash.
3. Always diversify
It is best to have a properly diversified portfolio of investments. Diversification of your investment portfolio across all asset sectors allows you to ‘hedge your bets’. If you spread your exposure across different sectors the overall effect is that you reduce the risk and smooth out your investment returns over time. This means investing in more than just equities and including other asset classes such as bonds, property and commodities.
4. Don’t panic
Investment markets go down as well as up. They always have and always will so you
must keep always keep the big picture in mind. If you are investing for the long term avoid rash decisions based on short term volatility. If your money is invested in accordance with the level of risk you can tolerate, stick with it and recognise that short term market wobbles happen. Markets tend to recover so it really does pay to be patient.
If you are investing for the long term, market fluctuations today will become largely irrelevant over time.
5. Being boring is usually better
The flavour of the month type of investments tend to be higher risk and although they may do well for a while, sooner or later most tend to fall in value, often quite significantly. Fashion is for clothes, not for investing! Steady funds with steady returns in steady hands are what most of us want, most of the time, for most of our money at least.
Don’t be greedy and if anyone promises very high returns, walk away as no one can guarantee that. If something sounds too good to be true it usually is.
6. Stop fiddling
Although regular reviews are important, if as in most cases, you are invested in managed funds, you don’t have to make too many changes too often. Every six or 12 months is fine in most cases provided you are appropriately invested.
7. Ensure you understand risk
Attitude to investment risk is a phrase bandied about in financial services but you need to ensure you understand the level of risk across your own investments. Too often I meet people who claim to be quite cautious who are wholly invested in high risk equities. Most people can take a certain amount of risk once they understand what it really means but it should be at a level that allows you to sleep at night. If you are not sure, find out.
Smart long term investing is not about market timing and stock selection as they only play minor roles in the long-term performance of your investments. It is about asset allocation, active reviews, seeking professional advice and sticking to your long term strategy.
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