Thinking about investing for the first time? Keen to refine your approach? Either way, a good place to start is to look to the people who do this for a living.
Here are five simple principles that could help you become a successful investor...
Remember investment values can go down as well as up, and you may get back less than you invest.
Focus on the long term
History shows that patience tends to reward investors. That’s why it’s best tackled as a long-term exercise over many years.
Timing the market is something that even professionals admit is nigh on impossible. Your investments will almost certainly suffer periods where they fall in value, but they are also likely to recover if you stay patient over time.
If you think you’re going to need the money next year for something like a wedding or holiday then investing may not be the right choice for you. But if you’re looking to build a nest egg for the future, it could be a great approach.
Aim to diversify your investments
Variety is the spice of life when it comes to investing. That’s because you’re spreading risk and giving yourself exposure to a wide range of opportunities. Many top investors would agree that a mixture of different investments is the best way to produce a balanced portfolio.
Another route to diversify is by having exposure to a number of geographical regions around the world. The idea is that when some investments are struggling, others may be rising. So, you’ll get a smoother journey over the long term.
It’s worth noting that diversifying doesn’t have to mean holding lots of products. Investing in a single diversified fund, like Wesleyan’s With Profits Fund, allows you to invest in a range of asset classes through a single product.
You can find out more in our guide to diversification.
Consider if you are an active or passive investor
If you’re new to investing - or simply don’t have the time to follow the markets every day - then a fund could be a good option. Two of the most popular types among established investors are 'active' and 'passive' funds.
- Active funds are actively managed by a team of fund managers who do all the hard work on your behalf. You pay a management fee when you invest in them. Active management means the managers can change the mix of investments to adapt to changing market conditions – attempting to 'beat the market'.
- Passive funds (often called index trackers) usually come with lower fees, which means more of your money is invested. However, they will only passively track an index – like the FTSE 100 in the UK or S&P500 in the US. There’s no active management, so no way to outperform the index.
If you’re not sure which one is right for you, then you may want to seek advice from a Specialist Financial Adviser from Wesleyan Financial Services.
Pound cost averaging
Many professionals would argue that slowly drip-feeding money into an investment can often be a smarter move than investing all in one go. Investing small amounts of money on a regular basis means buying units or shares at a variety of prices. Your money buys less when prices are high, and more when they are low.
The technical name for this is 'pound cost averaging', as you end up with an average price paid for each share or unit.
Investing in this way can help you become a little less emotional in your approach, because you’re investing no matter what state the market is in. It’s also a way to avoid being indecisive if you’re trying to time the market - which we know is incredibly difficult.
It also means your money is less vulnerable to the ups and downs of the market. You can find out more in our guide to pound cost averaging.
Consider your risk appetite
There’s always some risk when you’re investing. As the disclaimers always remind us, "you might get back less than you invested".
Risk is a personal issue for everyone, so it’s wise to work out your own appetite for it. Think about how much risk you’re willing to take, and what that means for the types of investments that might work for you.
Whatever your approach to risk, it’s a good idea not to check your investment too often - even though it can be very tempting. Remember it’s a long game, and volatility is a feature of investing. Markets will always have bad days, weeks and months.
However, the evidence still supports the idea that exposure to the markets over the long term can be a very effective way to build wealth over time.