While the coronavirus pandemic has left many Britons struggling financially, others have found it easier to save. With interest rates at historic lows, money held in cash is unlikely to keep pace with inflation and could be losing value in real terms.
The knock-on effect of this has been a rise in savers turning to investments, many for the first time. If you are new to investing, there are some questions you’ll need to ask yourself and some pitfalls you’ll be keen to avoid.
Here are five lessons for new investors:
1. Focus on your goals
When you set out to invest you need to have a goal in mind. This is the reason for your investment and the thing you will spend the money on when your investment ends.
Your goal might be retirement, helping a child onto the property ladder, or through university.
Not only will your goal determine how long you invest, and the amount of risk you are willing to take, but it will also be your long-term focus during periods of short-term market volatility.
In March 2020, the FTSE 100 suffered its worst day in 30 years. The markets since then have been steadily rising.
The FTSE 100 over the last year highlights the investment adage of “time in the market, not timing the market.”
Source: London Stock Exchange
Those investors who succumbed to emotion and sold low in March missed out on the gains that followed.
The general trend of the markets is an upward one. Stay focused on your long-term goal and you’ll stand the best chance of seeing good returns.
2. Understand your attitude to risk
Your risk profile will be individual to you. It will also be linked to your goal and timescales.
If your retirement goal is still decades away, you might be willing to take more risk than if you are saving for a child entering education in the next five years.
Managing risk isn’t about achieving the highest return as quickly as possible. It is about weighing up risk versus reward, taking the smallest amount of risk while giving yourself the best possible chance of reaching your goal.
3. Don’t follow trends
Though it might be tempting to join the crowd, following trends isn’t always the best investment strategy. The recent media coverage surrounding US retailer GameStop is one example of why.
GameStop stock has historically been “shorted”, a process whereby investors – “short sellers” – bet on the stock price falling. They borrow stock, sell it, and then immediately buy it back at a lower price before returning it to the broker.
When online platform Reddit promoted the stock, they inflated its price and hedge funds lost billions. Those who bought early and sold at the peak did well, while those late to the trend bought high and saw the price of their holdings crash.
Bitcoin too, the original cryptocurrency, has been rising since the end of 2020. But with a sharp rise comes the possibility of a sharper fall.
Source: Trading View
The Bitcoin bubble burst once before in 2017 and could do so again. Although some investors might see large returns, sticking to a long-term plan based on your goals could see the best results.
Diversification is how you spread your investment risk. It is the investing equivalent of not putting all your eggs in one basket.
You can diversify across asset classes, throughout different sectors and industries, and across geographical regions.
This diversification reduces your overall investment risk. If a sector or location suffers a market loss, your portfolio is protected by potential rises in other areas.
Spreading risk also means spreading the chance of reward. As your investment goal nears, rebalancing your portfolio will allow you to consolidate the gains you have made.
5. Advice from the experts
There are plenty of experts willing to share advice with would-be investors. Here are just three of them:
“Don’t look for the needle in the haystack. Just buy the haystack.” – Jack Bogle
Jack Bogle created the first index fund. The concept was simple: if we know the market generally rises, why not buy the market?
Rather than looking for the individual needle of a huge gain at high risk, take the safest route to your investment goal.
“Risk comes from not knowing what you are doing.” – Warren Buffet
Warren Buffet is CEO of American conglomerate Berkshire Hathaway and has an amassed wealth exceeding $84 billion. He has plenty of advice for would-be investors.
We at Boolers are here to help too, so speak to us if you need advice on any aspect of investing.
“The stock market is like the weather […] If you don’t like the current conditions all you have to do is wait a while.” – Lou Simpson
Patience is the key to investing. This is why you should only ever budget for the long term. As Warren Buffet puts it: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
Get in touch
Whether you are new to investing or looking to rebalance an existing portfolio, remember to ignore the noise and focus on your long-term goals.
At Boolers, we have decades of collective stock market experience. We understand how to build an investment that works for you, achieving your goals while sheltering you from unnecessary risk.
If you would like help reaching your investment goals, please contact us today.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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