In the week when economists at the Royal Bank of Scotland advised investors to sell equities (stocks and shares) and predicted global meltdown, we thought we would take a look at some of the key rules of investing.
Before we do though, the term “investing” or “investor” conjures images of middle aged men in pin stripped suits and red braces. But don’t be fooled, whether it’s your pension at work, a private pension or the ISA you put some money into years ago, you are almost certainly an investor and these rules affect you.
Rule #1: Don’t invest in something that you will stop you sleeping
Every investment carries risk, even putting money under the mattress can be risky; inflation will reduce its value and there’s always the risk of fire and theft!
That’s probably an extreme example, but it neatly demonstrates that there is no risk free investment.
The key is for you to understand and accept the risk that you are taking.
A professional adviser will spend time assessing the level of risk you are prepared to take and then recommend suitable investment options. Of course you could always do this yourself, although it takes a certain degree of experience and technical knowledge to make sure you get the right result.
Whether you take advice or the DIY route, you should never invest in anything which will stop you sleeping, even in the roughest of economic conditions.
Rule #2: If it sounds too good to be true, it almost certainly is
This is perhaps the oldest of all investing rules, but many people each year still fall victim to financial fraud and investment scams.
Simply put, if the rate of return you are offered is significantly above other more mainstream options, the investment may well be ‘too good to be true’ and should be avoided.
Be wary too of investments offering guarantees, either of the return you will get or your capital. Financial scammers and fraudsters will often mask the unattractive nature of what they are offering. by adding a “guaranteed” label, when reality it is nothing of the sort.
Rule #3: Investing is a long-term business
It was Warren Buffet who said: “Our favourite holding period is forever.”
Of course he’s right, investing is a long term business, there are no quick wins and anyone who invests in the short term is just as likely to get their fingers burnt as they are to make a profit.
Be prepared to invest for at least five years, ideally longer and remember, the risk of investing actually reduces the longer you hold and investment.
Rule #4: When markets fall, remember rule #3
We’ve established that investing is a long-term endeavour and stock markets do drop, crash, fall in value* over time (*the extent to which you are a natural optimist / pessimist will dictate which word you prefer to use!)
When stock markets fall, it’s vital you don’t give in to the natural temptation to cut your losses and run. In fact, if you do, you will crystallise your loss and not benefit from any future rally in values. It’s probably an indication that you are taking more risk than is acceptable to you.
If a fall in markets concerns you, talk to your professional adviser, they will be able to explain why your investment may have fallen value and advise you on the best course of action, which is often to hold your nerve!
Rule #5: Focus on the net return
Naturally successful fund managers like to quote the returns they have achieved, but don’t be blinded, you have to focus on the ‘real’ or ‘net’ return.
What do we mean by that?
Well, certain factors will reduce the real value of the return and your investment, for example fees payable to the fund managers themselves, the platform you invest on and professional advisers.
Remember inflation too, simply put, if your investment has made a return after charges of say 6%, but inflation is 2%, your ‘real’ return is reduced to 4%.
Rule #6: Don’t put all your eggs in one basket
The technical term for this common sense rule is diversification, the aim is to reduce risk.
In practice it means splitting your investment into different ‘asset classes’ such as shares, bonds, property and cash. The proportion you hold in each will depend on the level of risk you wish to take. As a rule of thumb, the higher level or risk you are prepared to accept the more you will invest in stocks and shares, of course the reverse is true.
It then makes sense to diversify further within each asset class, for example with reference to geography or currency.
Sounds complicated?
It certainly can be, which is where the expertise of a professional adviser and / or fund manager comes into its own.
Rule #7: Be careful who you listen to
Over our time as advisers, we have heard many horror stories of people investing after listening to others, for example their friends, the press, or so called ‘experts’ on social media.
Often these investments go wrong, fail to deliver the promised return and result in investors losing capital.
If you’re a DIY investor be very careful of who you listen to before you invest: How good is their knowledge? Are they experienced investors? Do they have ulterior motives?
Otherwise, take professional advice from a regulated and suitably qualified adviser.
We’re here to help
If you are nervous of investing in 2016, have seen the value of your investments fall recently, or are worried following the comments made by RBS, we are here to help.
Call Bev or Sarah on 0115 933 8433 or email info@investmentsense.co.uk, we are here to help.
