Ten top tips to ensure wise investment
Over time, investing money wisely should generate better returns than putting it into savings accounts. However, there is a minefield of good and bad advice out there. When investing money you will often hear supposed advice like “Buy BP”, “Sell Gold”, “Hold Oil”, “Now is a great time to invest”. Such advice is no different to “Lucky Gee, 2:50 at Chepstow”. Equally possible, you’ll be recommended an investment fund with excessive charges based on a supposed ability to outperform all others.
Moreover, with so many different asset classes, securities, derivatives, vehicles, structures and wrappers available, individual investors rarely have the time to sufficiently research their options.
So, when investing money, we suggest following these ten tips
1) Be clear on your personal objectives
A good financial advisor will create an investment portfolio based on your personal goals. This will ensure you don’t under-invest at the cost of your future goals, or over-invest at the cost of your short term spending needs.
2) Take risk, where you can afford to
In the long run, on average, assuming a well-diversified portfolio (see below), taking more investment risk should lead to higher returns.
However, before taking risk into your portfolio, consider what it means to you. If, in 5 years, your portfolio suddenly dipped by say 20% what would that mean to your goals? Could you still send your child to the school you wanted? If you can’t afford to take risk, you may be better off putting your money into savings.
3) Invest in markets – avoid “stock picking”
Despite what some might tell you, for the vast majority of people, “stock picking” is not an advisable strategy
Why is this? In a world where millions of people trade stocks and shares every day, it is almost impossible that you are going to see something in a stock’s valuation that everyone else has missed. Betting on a few specific stocks rather than investing in a well diversified portfolio is akin to gambling. You may win big, or you may lose big, and only luck will decide.
But I thought taking risk led to increased returns? Yes, but only in a well diversified portfolio, where you can be confident that given enough time firms in aggregate will continue to innovate, improve and create value.
4) Invest money across different “asset classes”
Asset classes – such as bonds, gilts, equities, commodities, currencies and property – differ in their risk and return profiles. More importantly, they are not perfectly correlated – one can rise while another falls. Put differently, investors can reduce certain risks by diversifying across asset classes (e.g., an interest rate rise might reduce the price of equities but increase the price of bonds). Therefore, investing across different asset classes can increase your expected returns for any given risk level.
5) Be wary of promises to beat (or time) the market
As above, millions of people trade in financial markets and therefore it is almost impossible to systematically out-perform the market. For this reason, many people prefer to invest in funds that track markets (“passive” funds), rather than pay a premium for actively managed funds. Exchange Traded Funds (ETFs), which are passive and can be bought and sold on open markets like stocks and shares, are becoming increasingly popular.
That said, a good financial advisor will know of areas where actively managed funds may deliver superior returns (particularly in less liquid or heavily traded markets – e.g., Venture Capital). However, we recommend caution, and the advice of a highly qualified financial advisor. Remember, some funds will always perform better than others due to either a) luck or b) taking on more market risk….so don’t be fooled by “past performance” statistics.
6) Invest money to offset “life” risks
You are exposed to more financial risks than you might realise, which your investment portfolio – if properly constructed – can help mitigate;
- Currency Risk. Do you hold property in a foreign currency? Or plan to buy one in the future?
- Inflation Risk. What impact will inflation have on your future spending plans?
- Business Risk. Do you own a business? Which sectors is it exposed to?
- Property Risk. Most of us are highly exposed to property prices.
7) Invest tax-efficiently
A financial advisor can show you many ways to achieve tax-efficiency with your investment portfolio, such as use of ISAs, Capital Gains allowances, Pensions and (in certain cases) Offshore investment. Inheritance tax planning is also vital if you are investing to leave a legacy. We recommend seeking professional investment advice.
8) Revisit your investment planning periodically; but not too regularly
Your investment advisor will work with you to establish a portfolio appropriate to your situation. Over time, this portfolio will “drift” as some investments over-perform and others under-perform. Moreover, your own circumstances will change. It is important that you review your portfolio with your financial advisor on a regular basis (maybe once a year). However, you should avoid “churning” from one investment to another needlessly, as you may not stay in anything long enough for it to perform, and will likely incur unnecessarily high advisory fees.
9) Don’t let fees and charges erode your returns
Investing can incur fees – both advisory fees from a financial advisor, along with charges within the underlying investment funds. It is important you fully understand these charges, and make sure they don’t offset any potential gains you might otherwise make. In total, charges can be as high as 3-4% of your portfolio, but with the right financial advisor they should be a lot less.
10) Seek the advice of a good Independent Financial Advisor!
We hope these rules provide useful food for thought. For most people, investing money wisely requires sound financial advice. Through VouchedFor, you can contact a recommended Independent Financial Advisor (IFA).