The financial services industry is full of jargon and sales messages so sometimes it can be difficult to separate fact from fiction, the reality from the adverts and the sales pitches. With that in mind, I have put together a simple guide to 10 practical and logical steps you need to follow when investing.
It is too easy to sidetracked from planning your future, our lives are busy after all, but it rarely needs to be as complicated as some might make out. My role is to make this simpler, and better, for you.
1. The very first step you need to take
Before you can even start thinking about investing, you need cash in the bank and my number one financial planning priority is to have an emergency fund.
The importance of this has been amply demonstrated this year with so many people suddenly being on reduced income, or no income at all.
2. Save as much as you can, as early as you can
The earlier you start saving, the easier it will be for you over the long-term. I am not suggesting that you shouldn’t be having fun in your 20s, far from it, but if you start putting money away as soon as you are able you will be grateful one day.
Being in your 20s is not too young to start savings and if you leave it until your 40s or 50s you will have to set aside far more of your income. I have lost count of the number of people I have met who wished they had started sooner as they face a retirement and old age where there will have to count the pennies.
We all need to strike a balance between living now and planning for the future but starting early, even with modest amounts is very worthwhile. Compound growth and interest over time really makes a difference to how much you end up with.
3. How much should I be saving each month?
How long is a piece of string? There really is no set answer but provided you have paid all your important bills, the next step is to set aside a percentage of your income – before you start spending it on non-essentials.
You will also need to be guided by what you have in assets already. As a very rough rule of thumb, someone in their 20s should be looking at 10% of earnings to start with. In time, increase that to 15% but give yourself flexibility and never pay it all into a long-term savings scheme where you have no access. In fact, there is no need to tie up your money without access these days.
If you are in your 40s and have no real savings, you probably need to be looking at saving 30% of your income to get close to a decent investment portfolio at retirement.
4. 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. In the simplest terms, consider this: if you are receiving interest of 1% a year and inflation is running at 3%, your money is reducing by 2% each year in real terms.
It is essential 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 for too long.
5. Always diversify
It is best to have a properly diversified portfolio of investments. Diversification of your investment portfolio across a range of 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. It also means not just buying property as that is not diversification.
6. 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.
7. Being boring is often 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 investments! Steady funds with steady returns in steady hands are what most of us want, most of the time.
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.
8. Stop fiddling
Although regular reviews are important, if as in most cases, you are invested in good managed funds (aka mutual funds, unit trusts, investment trusts, ETFs etc.) you don’t have to make too many changes too often. Every six months is fine in most cases provided you are appropriately invested.
A proper adviser will structure a suitable portfolio that will work over the long term and only make changes when needed.
9. 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.
10. Professional advice makes a difference
Multiple studies have shown that people who work with experts (and I don’t mean sales people so do check qualifications) are better informed, save more, and achieve better returns on investments over time.
As a qualified adviser, with far too many years of experience, I manage many millions of Dollars/Pounds of assets. My experience has taught me what doesn’t work as much as what does and I have access to a range of tools to allow me to thoroughly research funds and structure suitable portfolios. There is so much more to a good fund than a headline return. Not only are funds considered when structuring portfolios, there is consideration of the markets, market outlook, the future goals and plans of the clients, and potential tax liabilities. The latter is particularly important for expats but too often overlooked.
A good adviser will make the process simpler for you and you can get on with your life, while we manage your money with your interests at heart. Remember, I want you to make money. I also take over the management of existing investments and while it is not possible to perform miracles overnight, some just need a little TLC and proper ongoing management.
Smart long-term investing is not about market timing and individual stock selection as they only play minor roles in the long-term performance of your investments. It is about asset allocation, suitable diversification (not just tracker funds), active reviews, seeking, and taking, professional advice and sticking to your long-term strategy.
To arrange a discussion on investing smartly, or any aspect of your personal financial planning, please email me at firstname.lastname@example.org
I write articles such as this one as part of the holistic personal financial planning service and that I provide to expats, and the general consumer, financial and legal information that I provide in The National newspaper, , in othe media, and on the Facebook group British Expats Dubai.
Please take a look at the other useful articles on this website.
Other articles about investing:
The future of investing is… flexible
Are your investment funds in the dog house?
Why investing can be more than just money
The mystery of the missing pensions
The retirement time bomb – why it’s even worse for women