Whether you’re share dealing or dabbling in property, the path to successful investing is simple: Give yourself a goal, think long term and don’t let emotion cloud your judgment. It sounds easy enough, right? Yet so few people manage to stick to these basic guiding principles.
Many investors, even the really experienced ones, make the same frustratingly obvious mistakes time and time again. Take a look below at the most common balls-ups, avoid them like the plague and you’ll have a half-decent chance of making some decent returns from your investment pot – just don’t expect an overnight gold rush. Which brings us neatly to rule number one…
1. Give it time
Set yourself a timeframe for your investment; the longer the better, as it means you can take higher risk in the search of higher reward. For a portfolio of company stocks and bonds you should be looking at an absolute minimum of three years, but aim to stretch this out to 10, 15 years or even more if you’re hoping for some really good profits.
I love this stat… Looking at UK stock market data since 1969, if you’d invested a sum of money across the whole market for any one single day in that period, you’d have had a 55.2% chance of making a profit. Pretty much the same odds as a coin toss, right? If you’d stayed invested for a one month period your chances of seeing a positive return edge up to 63.9%. Invest for one year and your probability goes up further, to 82.1%. But invest for 10 years or more and your likelihood of turning a profit is an impressive 99.4%!!
2. Have an objective
Whether it’s a yacht in the Bahamas, supporting your kid through University, or building up a savings pot that will give you a luxurious retirement, having a clear goal in mind will really help you focus your investment decisions. Without that, the devil of human instinct will very quickly have you chasing short-term gains in the stock market – a recipe for disaster.
3. Embrace risk
Now, I don’t mean take big risks with your money. Not at all. But understanding risk and the level of risk you’re comfortable with is essential. Low risk generally comes with low reward. If that sounds like you, government and corporate bonds could be a good investment. High risk is more likely to generate higher returns. If that’s you, you’d probably look at buying company shares, perhaps in the more volatile Asian markets. But it’s a personal choice.
4. Spread it around
The famous American industrialist J Paul Getty once said: “Money is like manure. You have to spread it around or it smells.” How true. Investing in just a couple of company stocks is a dangerous game. Spread your investment across, for example, the list of FTSE 100 companies in the UK, and you can spread risk and your chances of soaking up some good profits.
5. Stay balanced
Rebalancing your investments… This is always a tricky one to grasp. It’s quite boring to be honest, a little complex and, when you do understand it, it still feels at odds with your inherent desire to invest where the money is. So what is it? Rebalancing is basically a way of keeping your investment portfolio, well, erm… balanced. That is, ensuring it stays in line with your objective and the level of risk you’re comfortable with.
Let’s take an example. You have a medium-risk investment portfolio with around 70% in UK and US stocks and 30% in bonds. The value of your stocks goes up significantly within the first six months. The temptation is to sell some bonds and buy more stocks, since they have been doing so well. You should in fact do the opposite. Your overall holdings in stocks has gone above the 70% you started with, as their value has increased, and this means your portfolio has become more high risk and therefore ‘unbalanced’.
If your investments go down, don’t panic. That’s very normal and should be fully expected. Stocks markets ebb and flow all the time and can do so for long periods before you realise good profits. Similarly, don’t become dazzled by so-called insider tips or media hype. There are plenty of newspaper column inches to fill with the latest and greatest insights on the week’s stock market movers and shakers. If the all these forecasters and pundits were as knowledgeable as they made out, they’d be making millions from their predictions and they’d be too busy to actually write about it.
In many ways, investing is a supremely rational activity. It is founded on data trends and financial facts. Yet we as humans are ultimately very irrational beings. We are inherently driven by emotion. Therein lies the problem – but also the solution. Strip out the emotion from your investment journey and there’s a fair chance it’ll be a more pleasurable and fruitful ride. Bon voyage!