Investing is something that’s often thought of as being far more complicated than it is. There are tricks and tips everywhere you look, and practically everything is dripping in jargon (unless you’re investing with Wealthify, of course). But with so many different techniques available, which ones actually work and why?
Buy low, sell high
As trading strategies go, buying low and selling high is up there in terms of popularity – and for good reason. If you buy something for £1 then sell it for £10, everything in the middle becomes profit. And, in a nutshell, that’s essentially all there is to this strategy but as you might imagine, this is something that’s much easier said than done.
The problem with this technique is that nobody knows which stocks are going to perform well and which are not. This means that in practice, buying at a significantly lower price than you want to sell for is extremely difficult. Not only could it take a lot of time to get to a point where it’ll earn you a decent profit, but it may never happen at all. This is why it’s very important to carefully research your investment choices and to think about diversifying your plan so that you’re not banking all your money on one company doing really well – because if it doesn’t you could be in a tricky financial situation.
Pound cost averaging
This particular investment technique is one that you might be employing without even realising you’re doing it. Essentially, pound cost averaging is buying investments at several different times and therefore getting different prices – for example, paying a direct debit into your Wealthify account. The fancy name comes from the fact that by buying investments at a range of different prices, you’ll essentially be averaging out the price that you pay.
It’s important to note that not all investing techniques are designed to increase your profits, some, like pound cost averaging, can be used to smooth out the journey and help reduce your losses. However, as you’re essentially reducing the effect of market swings, you could also see reduced profits compared to if you invested one lump sum.
When investing, you’ll ideally be looking to make a profit – these are likely to come in the form of dividends from stock or interest from bonds. One common technique that’s used by investors, is to take these profits and reinvest them. Now, you may be thinking that doesn’t sound very complicated, and you’d be right. But it’s the potential that this offers which makes it such a popular investing technique – and one we regularly use at Wealthify.
When you reinvest your profits, they could start making their own profits, which could then make more profits, and so on. This little trick – known as compounding in the investment world – could see your investments really start to add up over the long-term.
Depending on your point of view, diversification may not be as much a technique as a best practice. If you don’t know already, diversification is simply owning lots of different investments, rather than banking all your money on a select handful. Having a properly diversified investment portfolio is a technique which aims to reduce the amount of risk you take with your investments.
How this works is relatively simple, you know the phrase ‘don’t put all your eggs in one basket’? Well, it’s essentially that! Instead of putting all your money (eggs) into one investment (basket) you could put your eggs all over the place, tucked away in different types of baskets all over the world. This way, say the US stock market sees a significant dip, if your EU investments are doing well then it could help to balance out the overall impact.
Buy and hold
As far as investing strategies go, buy and hold is one that crosses over and features in many different techniques. For example, combining a buy and hold approach with reinvesting profits can work to maximise the potential benefit. But is this a technique or simply a time frame? Because buy and hold is really just another way of saying taking a long-term approach to your investments.
With buy and hold, you purchase an investment that you look to keep for months, years, or even decades. Not every investment needs to, or should be, held for this long but the general idea is that you keep hold of them. This long-term approach can help your investments to benefit further from the power of compounding and means that you may be less likely to be negatively affected by temporary market swings.,
One strategy that experts and beginners alike may consider is passive investing. And while that may sound complicated, it essentially means that you follow the market. One way of doing this is through funds – a collection of investments which generally have something tying them all together. For example, a passive fund that follows the FTSE 100 might contain a portion of each of the 100 largest companies listed on the London Stock Exchange.
Why would someone use this strategy? Quite simply, the money you’ve invested would follow the general direction of the overall market. So, using the example above, if the FTSE 100 goes up, your investments would too, but if it drops then you’d also see this reflected in your Plan. When passive investing is combined with the buy and hold approach it typically performs well. For example, data shows that anyone who was invested in the FTSE 100 for any 10 years between 1984 and 2020 had an 89% chance of making a gain.
Tying to implement all the investment techniques on your own can be cumbersome and time consuming, but robo-investing provides a different approach entirely. Instead of you needing to research, buy and sell investments, and maintain your portfolio to ensure it’s the correct level of risk, robo-investors can do this all for you.
What’s more, this can often be a cheaper option with low costs to entry, opening up the world of investments to anyone. There are even ethical investment options that allow you to align your investments to your beliefs. With Wealthify, getting started really is as simple as deciding how much you want to invest, the level of risk you’re comfortable with, then letting the experts handle everything for you.
And don’t let the name fool you. Robo-investing doesn’t mean that there’s just a computer crunching numbers to manage your investments – although that is a part of it. We have a team of experts who research, monitor, and manage your Plans to ensure they stay on the right track.
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.