Some investing tips for new and existing investors. A few things not to do!
The pandemic saw more people start investing whilst others invested more through the enforced savings brought about by lockdown.
Through the pandemic, many people have been able to save more – money they might otherwise have spent on commuting, holidays, eating out and entertainment – and this has given them the funds to invest, perhaps for the first time.
So as a new, or even an existing investor, how should you go about it and what should you do? It is quite easy to get advice from people – friends, family, journalists and of course financial advisers. They will be only too happy to tell you what to do! However, this article is a little different in that it tells you what not to do. And one of the first is don’t get your financial advice from Reddit or any other social media channel!
Beyond that, here are a few more of the ‘don’ts’ to bear in mind when investing. Many sophisticated investors will already appreciate most of these but a salutary reminder in times of change and uncertainty is no bad thing.
To start off, don’t invest for the short term. Investing is a long-term game, so consider a three-to-five-year time horizon as an absolute minimum. Don’t feel that you have to respond to every rise and fall in the market and don’t feel that you need to buy everything at once. Drip-feeding money into the markets or buying on the dips can be a good strategy for success.
Secondly, don’t keep changing strategy. Decide at the outset your financial objectives, take into account your circumstances, your risk tolerance and the level of volatility you are prepared to accept, then set a financial strategy and broadly stick with it. An annual review can fine tune any required changes.
Thirdly, don’t follow the herd. In other words, don’t be impulsive and jump on the latest investment bandwagon. It is natural to want to invest in exciting 'hot stocks' or the latest star fund manager. However, it is often the case that by the time you hear about this latest hot investment, the bandwagon has already passed and you could be buying near the top of the market. Recent history has shown the problems for some with this approach.
Others follow the ‘herding’ instinct’ when markets start to fall. Selling your investments because “everyone else is doing it” is not necessarily the best way to make important investment decisions. So don’t panic and sell your investments that are falling in value. This is usually not the best time to sell. The aim should always be to buy low and sell high. Time is an investor's biggest friend, as it allows the benefits of compound returns to take effect. Buy good investments and give them time to work.
Another mistake is to choose the best performing share or fund without taking into account how risky it is. A fund may well have outperformed simply because its manager is taking on a lot of risk - a strategy that may pay off well in a rising market, but could backfire if markets fall. You should look at the volatility of an investment as well as its potential returns. A high-risk investment may suit you but don’t take unnecessary risks.
Despite all the above, don’t be afraid of risk. Don’t become so afraid of the volatility of investments that you only invest in cash. Cash does not tend to be a good long-term solution and is not risk-free, as inflation eats into its value.
At the same time, don’t forget to hold some cash. Not only does cash reduce a portfolio's volatility, it also means that you are in a position to take advantage of new opportunities quickly, without having to sell something else when it might not be the right time to do so. Almost any investment portfolio should contain an element of cash.
Which leads nicely onto the next point; don't put all your eggs in one basket. In other words, don’t be too focused in your investment approach. Even the most aggressive investor needs to have a spread and balance of different holdings.
An undiversified portfolio almost by definition will only perform well some of the time. Diversification mitigates risk, because different sectors or assets perform well at different times. Remember the banking crisis of 2008 and the technology crash of 2000? Investors who were over-exposed to these areas suffered heavy losses.
A little caveat though; don’t be too diversified. If you diversify too much, your portfolio will tend towards the mean and simply track the market - what is sometimes called 'diworsification'.
Another salutary reminder is, don’t focus on the past - look to the future. Buying one of last year's top performers is the easy option – and it’s why so many people do it. However, history has shown that last year's best performing investments or market sectors rarely repeat the trick.
People often ignore the ubiquitous regulatory phrase – "past performance is not a guide to future returns.” Yet it is put there for a reason – it is essentially true. Of course, past performance can help when assessing an investment's potential, but it only forms part of the equation. You need to understand why an investment has performed well or badly and there could be various reasons.
Next, don’t give yourself sleepless nights. If a particular investment opportunity sounds exciting but worries you, don’t do it. All equities, bonds and funds rise and fall from one day to the next. Some of the most volatile investments have great profit potential, but obviously the risk of loss with them is always greater, particularly in the short term. Unfortunately, there is no such thing as a risk-free investment. Even cash itself is not risk-free and loses value in real terms, as inflation takes its toll. So, you need to be clear on your risk tolerance before investing.
Obviously too, don’t listen to the 'man in the pub' - or to dinner party chat - where exciting so-called investment opportunities can sometimes be aired. Firstly, they may not be what they seem and secondly any investment that might be of interest to someone else is not guaranteed to suit you. Your circumstances and financial objectives could well be completely different.
And as mentioned at the outset, don't listen to social media influencers and social media channels, where spurious and unregulated financial claims and opportunities are often promoted.
The above are a few pointers to bear in mind when you are looking to invest. One final one – if you need help with your investments, don’t forget to seek independent financial advice. An initial meeting with Kellands is free and without obligation, so do get in touch.