Anyone who reads the papers or watches the news knows that the world’s economies are going through a period of uncertainty. It’s natural at these times for investors to get twitchy, which only serves to make the situation even less predictable.
The truth is that share prices invariably rise and fall but, for the long-term investor, this shouldn’t need to be the primary concern. Historically, long-term performance tends to even things out and there are even good reasons to see opportunity where less savvy investors are seeing only gloom.
The world of investing is overflowing with metaphors, adages and fables, so here are seven sound principles for keeping your head when all about you are losing theirs.
Please speak to a financial adviser before making a decision to invest.
Seven Sound Principles of investing
It is one thing to have a target, but a sound financial plan can be the difference between simply hoping for the best and actually achieving your goals. It helps you to stay focused on your long-term aims without being distracted by short-term market changes.
The best way to formulate your plan and ensure it stays on track is with a professional financial adviser. We will talk to you about what you want to achieve for you and your family, your current situation, and your attitude to risk versus potential rewards. As well as tailoring a plan specifically to you, we can monitor its progress and recommend ways to keep it on course.
The earlier you invest the better. There is a reason that compounding, the ability to grow an investment by reinvesting the earnings, was referred to by Albert Einstein as ‘the eighth wonder of the world.’
The magic of compounding allows investors to generate wealth over time, and requires only two things: the reinvestment of earnings and time. The difference of just a few years can make a massive difference to your end result.
When markets are volatile it’s a big temptation to put all your investments in the relative safety of cash. It may seem like a safe bet. However, as they say, a ship is safe in harbour, but that is not what ships are for.
Every investor does need at least some part of their funds in liquid investments in case of an emergency, but low risk usually leads to lower returns. For anyone with longer term investment plans it needs to be supplemented with investments in other asset classes that offer better capital growth potential and beat the perils of inflation.
When markets are fluctuating wildly it’s all too easy to worry about the performance of certain investments while forgetting about the bigger picture.
One tree with stunted growth doesn’t necessarily mean the rest of the wood isn’t thriving. Similarly, when one asset class is performing poorly others may be flourishing. A diversified portfolio including a range of different assets can help to iron out the ups and downs and avoid exposing your portfolio to undue risk.
Many people believe that knowing when to buy and when to sell is the secret of successful investing. The truth is that no one knows with certainty when markets will rise or fall. Trying to time the market is not only stressful, it is very seldom successful.
It‘s far better to use time to your advantage. The sooner you can start investing, and the longer you can invest, the more likely you are to have the potential for healthy returns and achieve your financial goals, regardless of short-term blips.
When markets are volatile, it is often tempting to exit the market or switch to cash in an attempt to reduce further expected losses.
However, it is impossible to time these movements correctly as no-one has a crystal ball to predict future movement, so being out of the market for just a few days can have a devastating effect on returns. Make a plan, stick to it, and don’t try to time the market.
Every single investor’s needs are different and, while the points above are good general tips, there’s no substitute for a plan that’s tailored specifically for you.
The role of a financial adviser is to get to know you and your attitude to risk versus reward; and then to navigate you through your investment journey. What’s more, in turbulent times, advice helps you take the emotion out of investing and provides an objective view. It may just be the best investment you ever make.
Past performance is not a guide to the future.
Your investments may fall as well as rise in value and you may not get back what you put in.