Investing rules of thumb

How do you currently make your investing decisions?

Is it based on lots of analysis of company data and reading the financial press?

Or are you someone that buys shares based on your friends big hunch?

Right here, right now, there is no way I can tell you exactly where you should be investing your money. If we met and I learned more about you then I definitely could.

But until that happens there are 3 basic investing rules of thumb that have been proven to work over the course of history and will greatly increase your chances of success.

There is no one size fits all when it comes to investing

If someone puts me on the spot and asks “where should I be investing my money?” The only answer I can give is …… “it depends”.

Before investing your money you need to know why you are investing. This is the only time you are going to use your emotions when it comes to the subject of investing.

You need to think deeply about your values and what you want out of life.

Your values and goals will be unique to you and this is why your investment strategy will be different to anyone else’s.

If you’re in a relationship, make sure you discuss this with your partner as there is nothing worse than being secretive about money and not understanding each others wants and needs.

Once you understand your values you can set goals and once you know your goals you know the level of investment return you need to make, and the risk you can afford to take. It’s then a case of building an investment solution that will help you achieve what you want and can withstand the stock market crashes that will inevitably happen along the way.

The steps I described above are exactly what happens in the first and second meeting with a good Financial Adviser.

But there are some basic investing principles

So whilst through this article I cannot give the magic portfolio that is going to deliver the investment returns you require, there are 3 basic rules of thumb when it comes to investing.

1. Diversify your investment portfolio

Don’t have all your eggs in one basket.

At a high level, by diversifying your investment across different types of investment such as cash, bonds, property and equities (stocks and shares) you will reduce your overall risk.

There are lots of other ways you can diversify:

• Invest in a fund of companies rather than one individual company.
• Invest in different sectors of the economy rather than just one.
• Invest in different areas of the world rather than one country.

Diversifying your investments is a way of protecting your portfolio against the bad news that can happen anytime to different companies, sectors and countries. The overall effect will be much less painful than if you had all your eggs in one basket!

2. Keep your costs low

You can’t control investment returns but you can control costs and high costs are seriously damaging to your wealth.

There’s usually up to 3 different ongoing fees you will pay when you invest. A fee to the investment fund manager, a fee to the platform where you money is held and if you use one, a fee to a Financial Planner.

Ideally you should aim to get the combined total under 1% per annum of the money you invest.

There is a massive weight of evidence that suggests active fund managers do not outperform the general market after the higher costs they charge, so consider passive tracker funds that track a particular market at very low cost.

3. Risk and reward

In order to achieve any return on your investments you are going to have to take some risk. Even money held in a bank is not risk free. The bank could go bust and the interest rate is not likely to beat the rate of inflation.

So in order to achieve higher returns you will need to take higher risk.

The stock market and property market will crash again and again in the future – remember the financial crisis of 2007-2008? It’s a natural way of life. So you need to make sure you’re able to remain invested for the long term because over the long term the great companies of the world survive and go on to bigger and better things.

Reward and risk. You can’t have one without the other but if you deploy the practices of the first two rules of thumb you will be able to get the best of both worlds. Good returns over the long term with much less risk taken.

Successful investing should be really simple. Build the right portfolio that is aligned to your values and goals and then let it do its job. Don’t keep checking it. Don’t touch it when the stock market crashes and everyone else around you is losing their head. Be calm and keep your head and if you don’t trust yourself to do that. Use a Chartered Financial Planner.

For those that want more detail on this subject, I highly recommend the book ‘Smarter Investing’ by Tim Hale and our ‘Simply Investing’ guide below.

Risk warning:

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.