2017 saw a decent year of returns for investors in the stock market but for those of you that think you can outperform the stock market you may be thinking, new year new investment ideas are needed.
The problem is that when it comes to something new in the investing world it is very difficult to predict how it is going to perform and whether it has a solid future.
In the past we have seen technology, biotechnology and even digital currencies like Bitcoin become new themes that investors have tried to buy into and get ahead of the crowd. But these themes have all had very volatile periods where, if you have bought in at the wrong time, could have seen the value of your investment fall significantly in value.
So my main investment idea for 2018 is not actually new but to stick with a strategy that has worked over the long term through all the horrific stock market crashes you can remember e.g. Black Wednesday, tech boom and bust and the financial crises.
Here it is:
#1 – Diversify
Don’t have all your eggs in one basket.
Spread your investment money between different investment types, countries and companies. That way if one area does bad it will only have a slight impact on your overall portfolio. Whereas if you are 100% invested in one area you could make 100% loss if it goes wrong.
#2 – Determine your asset allocation
What I mean by this is, choose which types of investment you want to make and how much of your investment money you are going to allocate to them.
There are four main types of investment asset:
- Cash – Money in bank accounts
- Fixed interest/Bonds – Loans made to companies and governments in return for a regular interest payment and your money back at the end of the term.
- Property – Residential and commercial property.
- Shares – Also known as equities.
Research by Vanguard, one of the largest investment companies in the world explains that between 80% and 90% of investment return is determined by your investment mix (asset allocation). So it’s much more important to get the big decisions right in terms of which areas you are going to invest in rather than the individual shares.
#3 – Keep costs low
Investing is one area of life where you get what you DON’T pay for.
The example below from Vanguard highlights the effect of higher costs for managing your portfolio.
Three people each invest £10,000. The investment return is 6% per annum for all and this is reinvested. Investor A pays 0.25% in charges. Investor B pays 0.75% and Investor C pays 1.5% per annum. These may seem small amounts, but look at the difference in the outcome.
After 30 years, Investor C will have £37,000, Investor B will have £46,000 and Investor A will have £53,000. A massive difference. Investor C has given up £16,000, the equivalent of over 30% of their potential return, just on higher costs.
#4 – Rebalance
Once you have determined an appropriate investment mix for you it is best to leave your portfolio to get on with it’s job and let it do its thing. The only time you should tinker with it is to rebalance, perhaps every 6 months.
Rebalancing is the process of buying and selling the individual components of your investment mix so it is back in line with what you originally decided on. You see over time different parts of your investment portfolio will perform better than others and as they grow at a faster rate they will form a bigger and bigger part of your mix which could mean the risk level of your mix has increased. Rebalancing ensures that you stick to your original strategy with the added bonus of automatically buying low and selling high!
New year new investment ideas or perhaps new ways to access old ideas that work
If you are new to investing then you need to be organising money priorities before putting any of you money at risk.
If you are ready to invest then perhaps this article is more about new ways to access old ideas.
This was definitely an area that people become more familiar with in 2017. There are now a number of websites that will allow you to create an online account and help you determine an appropriate investment mix for you. Basically you can put together the 4 key ingredients described above for very little effort.
However be wary of the term advice. No computer can yet work with you on an emotional level and give you complex tax advice. You should also ensure you are very clear on the charges you are paying.
Next generation Financial Adviser
If you want to go a step further and use the best of robo advice whilst still spending time with a real human every so often then the next generation of Financial Advisers could be what you are looking for.
A next generation adviser will be highly qualified (to degree level), operate a pricing policy that is fixed, no contracts and transparent on their website. They will meet at a time an place convenient for you, 24 hours a day, 7 days a week.
They will not ask you to transfer your investments to their recommended platform if it is not appropriate and can work with you on a consultancy basis so you can use whatever robo advice service you like.
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.