5 golden rules for investing

Friday, 12 February 2016

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Edinburgh, Fife & UK IFAs

We know how difficult and nerve-wracking investing can be, but it doesn’t need to be. Following 5 simple rules can help.

1) Think about how much volatility you will be comfortable with in your investment portfolio.

A VERY rough rule of thumb is that equity funds frequently rise or fall by 20% in a year, and in one year in ten they could rise or fall by 50%.

Corporate bond funds usually move up to 10% either way each year, but in freak years this range rises to 30%.

Government bond funds have a smaller annual range of +- 5%, usually, but can get into the mid teens.

Property funds are funny things – they tend be either rising quite steadily (most of the time) or dropping 40% in two years (2007-2009).

Work out how big an annual rise or fall you could accept without losing sleep, and use that to select a mix of the above fund types. If you are unsure of how best to do this, getting independent financial advice on your investments is worth thinking about.

2) Diversify

When you are investing your money it is wise to spread it out as much as possible. Spread your money across the asset classes listed above. Buy several different funds, and buy funds that invest in hundreds of even thousands of individual stocks. Buying “passive” funds (where the manager just tries to match the performance of a stockmarket index like the FTSE All Share) is the easiest and cheapest way to do this. Don’t expose yourself to the risk of one stock, or one bond, or one fund manager, doing badly.

3) Only invest money you don’t need for 5 years

If you know you need a certain sum of money in the next 5 years, keep it in cash. The investment markets are volatile, and you don’t want to be having to withdraw your money just after a stockmarket crash. If you have money that you know you can lock away for 5, 10 or 15 years then start investing that.

4) Invest in little chunks, not all at once

No-one wants to put their money in to the stockmarket just before a crisis. To reduce the risk of this, invest your money over a long period of time. We suggest that you take whatever you want to invest, divide it by 18, and invest a chunk each month for the next year and a half. This process can be automated for you if you like – ask us how. If the market rises, then at least you will have made money on what you have invested so far. If the market falls, you have saved yourself some money and you get to invest at lower prices.

5) Don’t try to second guess the market

When you have decided on how much of your money you want to be invested in equities, bonds and property, stick to that plan. Don’t be tempted to try to buy more equities “at the bottom”, or sell “at the top”, because no-one knows exactly when this will be.

Having said that, keep an eye on your portfolio, and if market movements mean that it no longer looks like you originally wanted it to then make some adjustments.

Investing is for the long term, and your portfolio should not cause you sleepless nights. If you are concerned that your investments are not following the rules above then get in touch.

Chartered Financial Planners. FCA Regulated (FCA no. 603653)