Tim Bennett sums up five ways you can boost your chances of investing successfully.
The best way to invest
“Investing should be simple but it isn’t easy” said Warren Buffett, the US billionaire investor. Here are five key considerations for both novice and more experienced investors alike that should ensure you don’t make it unnecessarily difficult. For more information on any of these, please speak to an Investment Manager.
1. Don’t be a DIY investor by default
The decision to “go it alone” and make all of your own investment decisions shouldn’t be taken lightly – it may suit those who have the knowledge, time and experience to run their own portfolio of investments but it won’t suit others who don’t. It certainly shouldn’t be seen as the default option on the basis that it is cheap – some “XO” services are not as cheap as you might think and besides sometimes it is worth paying someone else to help you (“advisory”) or to take away the hassle of investing altogether (“discretionary”). Get this decision wrong and investing can be a lonely experience particularly in volatile markets.
2. If in doubt, drip-feed
Whilst plenty of studies show that over the very long-term a lump sum approach to investing works best given that stock markets generally rise over time, it won’t suit all investors in every circumstance. Drip-feeding can be useful in situations where a market is volatile or perhaps has risen to all-time highs as we have seen recently. That’s because it reduces the “prevarication risk” – an investor might sit on the side-lines in cash for too long – and it also reduces the risk of an immediate hit to your capital should you time a lump sum just ahead of a big dip in the market. What’s more drip-feeding can be better from a cash flow perspective and offers a “lock up and leave” approach that will suit investors who don’t want to scramble around to find investment lump-sums towards the end of the tax year.
3. Don’t pay too much tax
As the end of the tax year approaches, investors should be making the most of their Individual Savings Account allowance and Self Invested Personal Pensions allowance. For maximum flexibility an ISA allows you to invest up to £15,240 into stocks and shares, sheltering them from subsequent income and capital gains tax, whilst offering you the chance to access your money later should you need to. Whilst no-one can guarantee your returns from shares and you may even get back less than you invest in a tough market, the potential power of an ISA is shown here in terms of its ability to generate tax-free returns (in green) on top of the amount you contribute (in pink) at three different assumed growth rates.
4. Pick the right tool for the job
Whilst the media is obsessed with the debate about whether a passive or active investing approach works best, the truth lies somewhere between the two. In some circumstances a passive approach will achieve the best result whilst in others it may not – i short, judgement is required. Here is a summary of the factors you should weigh up;
5. Don’t be fooled by your own brain
Humans are predisposed towards certain behaviours that can be less than helpful when investing. Here are just three examples;
- Irrational thinking (e.g. “it can’t get any cheaper”). Just because a share is cheap, it may not also be good value or worth buying
- Cutting winners (e.g. “I always bank a 10% gain”). Systems are great sometimes in investing but applying them too rigidly can prevent you, in this case, from running winners
- Herding e.g. “This many people can’t all be wrong”). Crowd-chasing is a risky way to try to make money because if you simply follow everyone else in and out of stocks, sectors and markets you will end up buying high and selling low – the exact opposite of what you should be doing!