Investing, whether that is via your pension, ISA or an investment account is a simple process made complicated by the cacophany of noise that pervades the financial services market.
Google ‘investment advice’ and 324,000,000 results come back. ‘Investment ideas’ generates 163,000,000 results. So where to start?
The first place is to understand the the financial services industry is vast, complicated and wants to get it’s hands on your money. This has created a huge marketing machine telling you “what’s hot right now”, “what invesments to avoid” and “hidden gems”. With thousands of different funds to invest in it is easy to get lost in the maze and give up.
However, strip it back and it is fundamentally a simple process:
-Understand the higher the returns you want for your money the more investment risk (as measured by how much the returns go up and down by over time) you need to accept.
-Know that nothing is really guaranteed (big organisations fail too) and if it seems to good to be true, it is.
-Decide what you need your money to achieve and by when. Do you need to grow it to a specific amount, produce an income or just maintain it’s value?
-Decide how much investment risk you are willing to take to acheive these goals. You may need to be prepared to compromise one or the other.
-Know that over the long term equities (shares) outperform all other markets, particuarly when including dividends. But, accept that this means periods of stock market crashes as they seek to find their true value.
The premise behind this is also simple: the purpose of a company is to return value to it’s owners (‘investors’ in a publicly owned company) in the form of income (dividends) and capital growth.
The perceived value of a company (and therefore it’s share price) changes over time as investors receive and evaluate information. The greater the perceived good news the greater demand to own shares thereby increases in the share price. And so it continues until the time comes when more investors believe the price of the share is too high for the underlying value and decide to sell it, leading to a falling share price. When this is repeated across a stock market it creates a stock market crash.
-Fixed Interest Securities (Government Bonds, also known as Gilts/Treasuries and Corporate Bonds) are lower risk than shares and so provide less growth potential. They are therefore used in a portfolio to reduce the overall risk and to provide income (referred to as interest).
The less financially secure the organisation the higher the interest provided as compensation for investors taking more risk.
-Commercial Property is another source of capital and income that can be used within a portfolio.
-Accept investing is a long term game not a quick win casino. Buy and hold, don’t speculate. Investor behaviour is often the greatest determinant of long term returns. Most investors are their own worth enemies because they get greedy when markets are growing and panic when they are falling selling at the worst time; an investment loss is only so when it is sold.
-Charges will also destroy returns so don’t pay what you don’t need to. Over the long term there is no evidence to suggest higher cost, active management provides higher returns than simply following an index at a lower cost.
-Nobody can successfully time markets so don’t try to be clever and get in and out. Numerous studies have shown you will have greater returns if you stay in and ride the storms.
If you accept these principles everything else becomes unnecessary noise. For example:
You may read that the price of gold is surging and want to buy in but gold is as volatile as shares without the income opportunities and, over the long term, not as high growth.
Buy to let investing is expensive, illiquid, needs your ongoing management and doesn’t provide the same returns as global stock markets.
So to achieve your financial goals: invest for the long term, accept risk is a necessary part of investing, invest in a mix of global assets and don’t pay more than you need to.