There’s a wealth of information available on ‘how to invest’, but not a lot about how to ensure you have a successful investment experience. Below are some of my top tips to cut through the ‘noise’ and help you understand the fundamental things which matter when it comes to investing.
10 Top Keys to Investing Success
1. Know Your ‘Why’
Money is an incredibly emotive issue, and understanding what influences your financial decisions is crucial.
The first and most vital step is to set out your vision for the future, both in terms of your lifestyle goals and the money needed to fund them.
Understanding how important it is that each of them is achieved is critical when investing. This means spending some time determining your life values.
There are several questions you should be asking yourself, long before you dip your toe in investment waters:
- ‘What’s important about money to me?’ – i.e. what does money represent to you? Freedom? Choice? Stress? Worry?
- ‘If money was not an issue, how would I choose to live my life?’ ‘What would I do differently?’
2. Plan Your Portfolio with the End in Mind
A portfolio is NOT a plan. Everybody needs a financial plan (but not everybody needs a financial planner!)
What is the portfolio is trying to achieve? To answer this question, you need to have determined your goals.
- At what age would you like paid work to become optional?
- How much will you need to live on when you cease paid work?
- What goals/tangible things or events do you want to achieve to help you experience your values?
- Are there milestones in your life by which you measure your success that have a financial component?
You can access the planning tool we use with our clients, free of charge, here.
3. Determine Your Available Resources and How to Allocate Them
Every investment portfolio should comprise three basic elements:
- ‘Sleep-at-night’ fund or emergency fund – readily accessible cash to cover emergencies
- Short to medium term requirements – cash or cash based investments (e.g. National Savings certificates – when available) to meet known planned expenditure in the short to medium term (3 to 5 years).
- Long term portfolio – to be invested to meet the cost of your long-term goals. This element might include investment wrappers such as pensions, stocks and shares ISAs, and other investment based accounts. You might be investing lump sums, regular savings, or a combination of the two.
4. Determine the Level of Risk You Can Afford (And Need) To Take
- The investment risk you need to take to achieve your goals, i.e. the annual rate of real return that you need to maintain your lifestyle and other goals (your financial plan will determine what this is);
- Your emotional tolerance to risk, as measured by a psychometric risk testing tool. (You can find out your own risk tolerance here).
- Your financial capacity to adapt your lifestyle in the event of a permanent loss of capital and/or investment returns turning out to be lower than anticipated.
This might involve needing to work longer, spend less, earn more, downsize your home. Would any of these options work for you if needed? What are you not prepared to compromise on? (this relates back to your values and goals).
5. Decide on the Asset Allocation of Your Long-Term Portfolio
NOW you can start thinking about ACTUALLY investing your money!
As Warren Buffet once said: ‘Investing is simple, but not easy.’ The process can be very simple; the discipline of sticking to the process can be much harder!
Remember, as is often the case, less is more. The asset allocation of your portfolio can comprise just three asset classes:
- Cash (a small amount to cover any fees, for example if you use an investment platform);
- Fixed interest (i.e. government bonds) and
- Equities (shares).
The right mix of assets for YOU should primarily be determined by your risk profile and the cost of your goals (see above).
6. Create Your Long-Term Portfolio
Once you have determined the asset allocation of your long-term portfolio, you can then go ahead and invest your cash (or reallocate what you already have invested!).
The most important thing to remember at this stage is that COSTS MATTER. In investing, you get what you don’t pay for, as John Bogle, founder of Vanguard wisely said.Do your homework and make sure you know the TOTAL COST of what you are planning to invest in.Click To Tweet
Do your homework and make sure you know the TOTAL COST of what you are planning to invest in.
7. Review Your Plan Regularly
Plans evolve. Life never moves in a straight line and nor will your portfolio. The asset allocation of your portfolio will change over time so maintain a disciplined approach to rebalancing it back to your chosen asset allocation.
Once a year will be sufficient for most people.
8. Stay the course!
Warren Buffet said it best:
‘To invest successfully over a lifetime does not require a stratospheric IQ, unusual insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.’
The good news is that if you have invested in line with your emotional tolerance to risk you shouldn’t find it a problem to stay the course.
There will be bumps in the road. Markets can – and do – go down as well as up, but if you have invested in the market only to the level with which you can cope emotionally, you will not be tempted to bail out when the next market downturn occurs.Remember, selling your equity investments when markets fall is a guaranteed destroyer of wealth.Click To Tweet
9. Leave Your Portfolio Alone!
Beyond your annual rebalancing review, avoid the temptation to look at your long-term portfolio too frequently. Just leave it alone.
10. If it Looks Too Good to Be True, it Probably is
When it comes to investing, there is no such thing as a free lunch. If you can invest with the above tips in mind, your chances of a successful investment experience will be far greater than if you simply accumulate investments with no overarching strategy.
Share with us! Have you made any investments recently? What tips would you give our readers? Is there anything you would do differently if you were to invest again?
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