5 Principles of Sound Investing
Of course we remain vigilant about all of these potentially damaging events, but all of the time we stick to some important principles that have stood the test of time for investors for many years now.
Learn the Market Cycle
The investment market usually (but not always) follows a typical cycle as shown below. While you obviously cannot rely on all of the different factors coming together as illustrated, this is a useful picture to bear in mind.
There are always anomalies, such as the unprecedented low interest rates that we’ve seen in the last few years, but remaining aware of the market cycle can help you to avoid letting greed or excessive caution cloud your judgement.
Diversification is key
There is always the temptation for investors to follow the latest and supposedly greatest hyped-up investment. This might be investing only in property (remember what happened in Ireland 10 years ago…) or indeed acting on a great share “tip” that you got. Putting all of your money into one area is an extremely risky strategy; if it goes wrong, you could lose the lot.
Always spread your risk and build your wealth through funds or pools of assets. This diversification will give you some protection against one of the companies you’re invested in, or even one of the asset classes going south.
Volatility is okay!
When people get fixated on short-term changes in their investment and pension assets, volatility can cause a lot of concern. The focus turns to those short-term dips in returns and investors get anxious.
However volatility is simply a feature of long-term investing. Markets will go up and down, the critical tactic is to stay invested and not react to short-term factors.
Trying to time markets is folly…time and again it has been proven that you are better off riding out the peaks and troughs, rather than trying to call them yourself. However if you really struggle with the volatility of your portfolio, it’s possible that you don’t have the right risk-adjusted portfolio for you in place. Give us a shout, as we’ll help you to identify your appetite for risk and will design a portfolio that will allow you to sleep at night!
Know the magic of compound interest
Compound interest has a huge impact on investment and pension portfolios. For this reason, it is really important to start investing early, and to keep investing. The more time each tranche of your investment has to grow allows the magic of compound interest to really deliver!
To help see the effect of compound interest, it’s worth remembering the ” Rule of 72″. This is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself. For example, the rule of 72 states that €100 invested at a 10%p.a. return would take 7.2 years ((72/10) = 7.2) to turn into €200.
Knowing this rule will help manage your expectations in relation to the performance of your portfolio or will help you identify the return needed to double your money in a specific timeframe.
Time and compound interest are great friends of investors!
Cash costs you money
Cash in the bank today is simply a missed opportunity. Yes it is a safe haven and staying true to the diversified portfolio principle, it makes sense to have an allocation of your portfolio in cash. But many investors today have too much of their money sitting in the bank, being eroded by inflation and very low interest rates.
You have long-term financial goals and probably need a level of investment growth to achieve them. Leaving your money sitting in cash is likely to undermine your chances of achieving your goals.
At the end of the day, investing is not always straightforward. Your emotions, doubts and behaviours can get in the way and undermine your likelihood of success. But that’s where we come in. As your independent financial adviser, we can be completely objective and can help you plot your course to help you ultimately achieve your investment goals. These are a few tips to help you along the way – we of course would be delighted to discuss any of these or indeed any aspect in relation to your investments.
|Warning: If you invest in these funds you may lose some or all of the money you invest.|
|Warning: The value of your investment may go down as well as up.|