Putting your money to work – the basic principles of investing
January 12, 2021 - 4 minutes read
Posted by Claire Parker
Rather than having leftover funds sitting in a bank account doing nothing, learning more about the basic principles of investing will ensure that all of your money is working hard for you, not just your existing securities such as your pension, ISA and business and property assets.
If you have a lot of cash currently unallocated, you may find it helpful to speak to a member of our financial planning team who will be able to look at tax planning as well as investment opportunities that may be right for you. Book an exploratory call.
Keep it simple
Investing needn’t be complicated. A financial plan shouldn’t cost a lot, it should be easy to maintain, and most of all it should be straightforward, often running in the background with little or no input from you. So in order to build a successful financial plan that delivers results, whether you have £1000 or £1 million of leftover funds to invest, it’s important to stick to the basic principles.
“The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.” Benjamin Graham
When thinking about investing, stick to these rules
1. Employ an investing strategy.
What kind of investor are you? Whether you’re interested in value, growth or momentum, stick to a consistent approach. For example, a value investor shouldn’t get involved in momentum investing. Financial planning advice can help you determine what kind of investor you are, based on your tolerance to risk, investing timeframe and investment knowledge.
2. Accept the trade-off between risk and return.
Successful investing involves settling on a level of risk you’re comfortable with. Stocks can be a higher risk option than bonds for example. But the higher the risk, the greater the potential for a greater return on your investment, and it’s this trade-off that has to be carefully managed.
3. Invest with a margin of safety.
Price is key. If you secure an asset for less than its real value, then you’ve achieved a margin of safety and that means you’ve immediately lowered your risk. And when conditions are favourable, you’ll enjoy greater appreciation in worth.
Under-diversification and over-diversification are common portfolio management mistakes. 10 investments may be better than 5, but the benefits of adding extra investments start to reduce as the numbers increase until the costs outweigh the benefits. Somewhere between 15 and 30 investments seems to be the optimal amount. Having a highly diversified portfolio spread across asset classes such as equities, property, bonds and cash decreases risk in uncertain times.
5. Invest for the long term.
If you manage to purchase an investment at a great value price, it can take some time for the market to realise its true worth. That’s why long-term investing is a key principle to adhere to because short term trading will more than likely lead to poor long term results. The reality is that markets will always fluctuate, going up and down with regularity. That’s why it’s so important not to lose faith in your investment too soon. Hang in there and you’ll likely see your patience delivering profitable results.
“The stock market is a device to transfer money from the impatient to the patient.” Warren Buffet
6. Take advantage of compounding.
Compounding is your friend. Compounding or exponential growth means that an asset’s earnings are reinvested to deliver additional interest as time goes on. This can have a significantly positive effect on your finances. For example, if you started by investing £1000 and earned interest at a rate of 10%, by the end of the year you would have £1100, meaning you’ve earned £100 in interest. In the following year, you would earn £110 and so on.
And remember this golden rule – if it seems too good to be true, it probably is.
Beware of stories of incredible returns and get rich schemes, because that’s exactly what they are – stories. Successful investors avoid the pyramid schemes, quick fixes and outright gambles because they know that there are no shortcuts to success. Do your research. What’s their business model? How long have they been trading? What fees are they charging?
Always remember that the value of investments can fall as well as rise. Professional financial planning advice from our experts can help you identify what type of investor you are and employ the right investment strategy for you to help you make the most of your leftover money.
Whatever you end up investing in, the most important thing is your net return. You will still need to take risk and reward into account, but you’ll also need to ensure that your financial plan puts your money to work and delivers impressive returns.
To discuss the right approach to investment for you, please book a 30-minute no-obligation appointment with one of our experienced financial planners.