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What are the basic rules of investing?

Thinking about investing? Here are some rules worth knowing.
What are the basic rules of investing?
Reading time: 6 mins

If you’re a newbie investor and you want to maximise your potential returns, there are a number of habits that you may want to consider taking on board.

Or even if you've been dabbling in investing for a while, there still could be things you're doing that aren't allowing you to have the best possible experience.

So, here are some simple rules that could help you get the most your investment journey. 

Set your investment goals

Before investing, it could be worth considering your goals.

Why are you investing? Is it to pay for an epic trip, or are you saving for retirement? Maybe you just want to give your money more potential to grow over the long-term due to low interest rates being offered by banks?

Determining your investment goals will give you a better idea of how much money to put aside and for how long (roughly) you'll need to invest for. So, have a think, and list all the dreams you’d love to potentially turn into reality thanks to investing.

Determine your risk appetite

All investing comes with some risk. This is because you could end up with less money than you put in if markets perform worse than expected, and you withdraw your investment while it's at a loss.

This is undeniable and something you will need to accept as an investor. But there are things you can do to reduce your risk if you are the more cautious type. At Wealthify, for example, we'll manage your investments for you, making all the decisions based on the risk level you choose when setting up your Plan with us. 

But before you decide how much risk you want to take, you need to ask yourself the right questions to gauge your appetite for it. 

How comfortable are you with losing money? How much can you realistically afford to lose? What does your current financial situation like? Do you have an emergency fund? How much do you have saved in other pots? How long are you planning on investing for?

The risk level you choose is completely down to your personal circumstances and preferences, so it could be useful to keep these things in mind before you start.

Consider starting as soon as you can

When it comes to investing, it's about 'time in the market' not 'timing the market'. So, if your financial situation allows it and you're aware of the potential risks, then you might not want to procrastinate and wait for the right moment to join the investment world. This is because you may end up missing out on potential growth.

The earlier your start investing, the sooner your money could benefit from market movements and the power of compounding.

But what is ‘compounding’, you ask? Well, when you invest and make profits (or ‘dividends’), you can reinvest them by putting them back in your Plan instead of cashing them in. And by doing this, your gains could generate further gains. Think of it like a snowball rolling down a hill and getting bigger and bigger as it picks up more snow along the way.

Think about diversifying your portfolio

Regardless of your risk appetite, you probably want to try and mitigate the risk of losing everything.

So, how do you do this? Simply by spreading your money across different investment types (such as stocks, bonds and property, for example, and regions.

Think of it this way. If you invest all your money in one or two companies, you could be in for a nasty shock if these companies were to struggle and not perform. However, if you invest in a larger number of companies and different stock markets, the risk of losing all your money would decrease.

Plus, you increase the chance that poorly performing investments would be balanced out by others that are doing well, potentially limiting your losses.

Now, it can be quite a Herculean task to pick all the different investments you need to diversify your portfolio. Luckily, it’s possible to diversify without spending hours looking for the right investments.

Instead of buying individual shares, you could purchase investment funds – these are like pre-made hampers full of different, making diversification much easier. Plus, if you invest with Wealthify, we'll also make sure that your Investment Plan is diversified based on your chosen risk level.

Explore all your investment options

When it comes to investing, you’ve got plenty of choice. You can, for example, choose to invest tax-efficiently with a Stocks and Shares ISA or open a General Investment Account if you've maxed out your allowance for the year.

The great thing about Stocks & Shares ISAs is that you get to invest your money in the stock market, but you don’t need to pay tax on any profits you make, meaning you get to keep more of your money. For the 2023/24 tax year, you can put up to £20,000 in an ISA as a UK resident. 

You could also do your bit for the future by investing ethically. With an Ethical Plan from Wealthify, your money is typically invested in companies that are committed to doing good in terms of society and the environment.

So, if you want to give your money more potential whilst making a positive difference, why not open an Ethical Stocks and Shares ISA?

Pay attention to investment fees

No matter what you may see advertised, investing isn’t free. And whether you invest on your own, or use a digital investment platform like Wealthify where we'll do everything for you, you’ll need to pay fees that will ultimately eat into your returns. So, it’s important to keep these costs as low as you can.

One way to ensure you’re not paying too much is to shop around. Have a look at different providers or platforms and compare their fees.

But you might not want to just stop there. Make sure you look at their offerings too – after all, it’s not only about the charges you pay. The quality of the service you get will also matter.

Review your portfolio

Investing is a bit like cultivating a garden – you’ve got to do some pruning from time to time. So if you’re holding a portfolio, don’t forget to review it from time to time.

In the investment world, we talk about something called 'rebalancing', but the principle is similar.

But how does it work? Well, over time, the mix of investments in your portfolio may change, impacting your risk appetite. For instance, if you have a 50/50 split between shares and bonds but see that shares are performing better, you might want to take advantage of this by adjusting your portfolio to a 70/30 split in favour of shares.

Not only has your portfolio changed in nature, but your risk level has increased. So, to keep it on track with your investment style, you’ll need to rebalance it by buying and selling investments. And If this sounds too much like a big job, you can always use the help of online investment platforms (like us!) who will do this for you.

Think about the long-term

Over the short-term, financial markets have ups and downs, and it can be very scary to see the value of your investments drop. But if you want to make the most of your investment journey, think about the long-term.

Investing is something that you do for a number of years, not just a couple of days or even months, and this is because remaining invested over the long-term could come with many advantages. And by long-term’, we mean at least 5 years.

Firstly, it could give your money more time to potentially flourish. Secondly, you’re more likely to ride out the bumps and minimise losses that are normal to experience along the way. Finally, the last potential advantage of long-term investing is that it increases your chances to make a gain, according to many studies.

For example, people who invested in the FTSE 100 for any 10-year period between 1986 and 2021 have had an 89% of making a positive return1.

Try not to panic sell

As an investor, the value of your investments could go down, and when that happens it can be pretty stressful. But if you panic and sell low, you’ll make your losses real without giving the markets time to recover, and the value of your investments to potentially go back up.

If you stay in the game and stick with your investments for a while, your losses remain hypothetical, and you could benefit from better days to come. So, if you hold your nerve and stay invested, then you might find yourself glad you didn’t sell all your investments.

Ask for help if you need it

It’s often assumed that you need to be a financial expert to start investing, but that’s not true! With digital investment platforms, like Wealthify, you don’t need any investment knowledge or experience to get started.

In fact, you can be completely new to the world of investing and you could still become an investor. To get started with Wealthify, all you need to do is choose how much you want to invest and the risk level that suits you. We’ll then build your perfect Plan and do the investing for you, saving you plenty of time, hassle, additional cost, and lots of research.

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.


1: Data from Bloomberg

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