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 new to investing and want to maximise your potential returns, it’s important to adopt some good habits. Here are some rules that could help you make 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? Determining your investment goals will give you a better idea of how much you’ve got to put aside and how long, roughly, you need to invest for. So, have a think, and list all the dreams you’d love to turn into reality thanks to investing.

 

Consider your risk appetite
Investing comes with some risk, it’s undeniable and something you will need to accept as an investor. But this doesn’t mean you’ve got to risk it all if you’re the cautious type. Thanks to digital investment platforms, like Wealthify, it’s now possible to choose your risk level. But before you make any decision, you need to gauge your risk appetite, and this involves asking yourself the right questions. How comfortable are you about losing money? How much can you afford to lose? What is your current financial situation like? Do you have an emergency fund? How much do you have saved? And how long are you planning on investing for? The risk level you choose is completely down to your personal circumstances and preferences.

 

Consider starting as soon as you can
A good time to start investing is whenever you possibly can. Obviously, if you’re not ready to take the plunge, then don’t. But if your financial situation allows it, try not to delay your investment journey, because if you procrastinate and wait for the right moment to join the investment world, you may end up missing out on potential growth. On the other hand, the earlier your start investing, the sooner your money could benefit from market movements and the power of compounding. What’s is ‘compounding’, you ask? See, when you invest and make profits (or ‘dividends’), you can reinvest them by putting them back in your plan instead of cashing them. And by doing this, your gains could generate further gains. Over the long term, your money could pile up and snowball – this is compounding, and a good way to take advantage of its magic is to start investing sooner rather than later.

 

Think about diversifying your portfolio
Regardless of your risk appetite as an investor, it’s always a good idea to try and mitigate the risk of losing everything. So, how do you do this? Simply by spreading your money across investment types, and regions. 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. However, if you invest in a large 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 which are doing well, so your potential losses would be limited. 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 – they’re like pre-made hampers full of different, making diversification much easier.

 

Consider 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. The great thing about Stocks and Shares ISAs is that you get to invest your money in the stock market, but you don’t need to pay UK tax on any profits you make, meaning you get to keep more of your money. You could also do your bit for the future by investing ethically. With an Ethical Plan, your money is typically invested in companies that are committed to doing good. And if you want to maximise your potential returns 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. Whether you invest on your own or use a digital investment platform, 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 in fees is to shop around. Have a look at different providers or platforms and compare their fees. But don’t just stop there. Make sure you look at their offerings too – after all, it’s not only about fees and charges, the quality of the service you get will also matter, so try to keep an eye on that too.

 

Review your portfolio
If you’re holding a portfolio, don’t forget to review it. Investing is a bit like cultivating a garden, you’ve got to do some pruning from time to time. In the investment world, we talk about rebalancing, but the principle is similar. So how does it work? Well, over time, the mix of investments in your portfolio may change, impacting your risk level. For instance, say you have a 50/50 split between shares and bonds, but shares perform better, making your portfolio drift 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 your plan on track with your investment style, you’ll need to rebalance by buying and selling investments. If this sounds too much like a big job, you can use the help of online investment platforms. At Wealthify, we do the hard work for you, from picking your investments to making adjustments to your Plan, when needed.

 

Try not to follow the crowd
Remember when Bitcoin was the thing to have back in 2017? People would rush to buy the cryptocurrency and the media wouldn’t stop talking about it, adding to the craze. In December 2017, Bitcoin reached its all-time high at nearly $20,000. Now here’s the thing, a few weeks later, the value of Bitcoin went down, very, very quickly. And by November 2018, the cryptocurrency was below $3,500, leaving many investors with large losses1. What this story illustrates is the dangers of herd mentality. Following the crowd rarely pays off in the investment world, so try to ignore the noise and remain focused on your long-term goals.

 

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 fluctuate. But if you want to make the most of your investment journey, it’s important to think about the long-term. Investing isn’t something you do for a couple of days. It’s something you should be doing for a number of years. Remaining invested over the long-term comes with many advantages. Firstly, it gives your money more time to potentially flourish. Secondly, you’re more likely to ride out the bumps and minimise losses. Finally, the last advantage of long-term investing is that it increases your chances to make a gain, according to many studies. People who invested in the FTSE 100 for any 10-year period between 1986 and 2019 have had an 89% of making a positive return2.

 

Try not to panic sell
As an investor, the value of your investments may go down, and when that happens it can be quite stressful. But if you panic and sell, you’ll make your losses real. Alternatively, if you stay in the game and stick with your investments for a while, your losses will remain hypothetical and you could benefit from better days to come. Obviously, nobody can predict the future and say whether falling markets will recover, but historically, they have always eventually bounced back. So, if you hold your nerve and ride out the current dip, you might find yourself glad you didn’t sell all your investments.

 

Ask for help if you need to
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 much 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. All you need to do is choose how much you want to invest and the risk level that suits you. We’ll do the investing for you, saving you plenty of time, hassle, additional cost, and lots of research.

 

References:

1: https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp

2: Data from Bloomberg

 

 

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.

 

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