A successful investment can mean the difference between retiring early or working longer than you want to.
A successful investment should never be as a result of luck.
A successful investment is the only real way to find financial freedom. The point at which you never have to worry about money again.
Do you know when your financial freedom date is?
Anyone can generate real wealth over time, you just need to use 6 elements in your investment strategy.
Why you need a successful investment
If you want the money you earn or inherit to grow in value over time, then you either need to save it or invest it.
Just leaving it ‘under the mattress’ or in a bank account will mean your money actually loses value in real terms because of inflation.
Investing your money means buying property or stocks and shares (equities).
If we look back over the last 100 years, the average return from equities is 5 times that of cash interest rates!
Now, cash does have its place in any sensible financial plan, just not when you are making a successful investment.
How to ensure a successful investment
#1 – Know your targets
You should never be investing for investing’s sake. There should always be a reason as to why you’re investing.
It could be:
- To retire early.
- Child/Grandchildren education fees.
- Build a business
- To build up a fund to gift to the kids.
Ideally you want to have a target date and an amount in mind so you know what you are aiming for. This will then drive what type of investment you should be making.
#2 – The return you need
By having a target date and an amount in mind you can work out what return you need to make to achieve it.
Now, when you do this you may find the return required is too high and that’s fine. This is really useful information because it means you can make adjustments now before it’s too late.
It could mean you either need to save more or put back your target date to give your money more time to grow.
#3 – Risk
Investing is about taking risk to achieve a better reward.
The higher the risk, the potential for higher the reward, however you should never just go for the highest risk investment because you feel you can handle the ride!
The risk you take should link in with your investment target (see point 1 and 2). There’s no point taking excess risk if you don’t need to unless you feel like going for higher targets because you are comfortable with the risk.
#4 – Diversify
When it comes to risk, the way to manage it is to ensure you have an investment portfolio that is well diversified.
This means you hold investments in different asset classes like equities, bonds and property in countries all over the world. Remember the UK only represents about 5% of the world economy.
Consider this. A properly diversified investment portfolio may have 10 funds, with a 100 different shares in each fund, meaning a spread of 1000 different companies and assets. If one company was to go bust it would be just 0.1% of your portfolio!
#5 – Costs
You need to keep a close eye on the cost of investing and running your portfolio.
Investment fund managers and online platforms will usually charge a percentage of what you invest with them. Try to keep the total costs to below 1%.
Remember, every cost you pay is money taken away from your overall return.
We can’t control investment returns but we can control costs.
#6 – Re-balance and Review
Finally, once your successful investment strategy is set up, you need to keep an eye on it.
I don’t mean checking the stock market every day and making changes. I mean perhaps once or twice a year. Checking costs and making sure the investment fund managers are doing what they said they would.
It’s a good idea to re-balance your portfolio, meaning selling the funds that have done well and buying the funds that have done less well. This not only helps keep you within the risk level you are comfortable with but also forces you to do what successful investing is all about. Buy low and sell high!
You could even leave it longer than a year as really you should only be making more fundamental changes if your target in point 1 changes.
If you would like more information on successful evidence-based investing, then why not take advantage of our free 15-minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.