Investing your hard-earned money can seem daunting, but a careful balance of risk and reward has the potential to see your money grow.
The last few years have seen periods of sustained high inflation and the erosion of the real-terms value of cash savings.
Stock markets, meanwhile, can be volatile in the short term. But a diversified and risk-managed investment should allow your money to ride out these dips, with the potential for meaningful returns on the way to your long-term goals.
Keep reading for five important lessons to help you consider your options and invest like a pro.
1. Think carefully about your risk profile
First up, you’ll need to decide if investing is right for you.
That means considering the answers to some important questions:
- What would be the goal of your investment?
- How far in the future is this goal?
- How much can you afford to invest and what is your capacity for loss?
These three answers are intrinsically linked.
Investment is a long-term proposition so you’ll need to think about a long-term goal. The level of risk you are willing to take will be tied to your goal and how far away it is.
The further away the goal, the more risk you might be willing to take.
How you approach your investment will be determined by your wider attitudes to money. You might be generally risk-averse or prefer spending now to saving for the future. Think carefully about how much you can afford to lose and remember that your risk profile is allowed to change.
You might be willing to take more risk when investing in your own pension than with your child’s university fund, for example. Or, as your retirement date nears, you might decide to lower your risk exposure, consolidating gains already made.
2. Diversify across asset classes, sectors, and regions
One way to spread your investment risk is to diversify your portfolio.
This means investing in different asset classes. Stocks and shares are generally higher risk but offer the chance for higher returns. Government bonds meanwhile will be considered lower risk but will likely provide less impressive returns.
Managing your asset allocation will ensure your portfolio always aligns with your risk profile.
You might also diversify across different industries or geographical regions.
By spreading your investment, you lessen the impact of a loss in one area, because it will hopefully be offset by a rise in another.
3. Be aware of your own biases
In the same way that your attitudes to money can form as a child, you might’ve inherited or developed your own conscious and subconscious biases too. Some are simply part of what makes us human.
Biases might include:
- Confirmation bias, which could see you seek out only the news sources and market reports that back up the views you already hold. Always engage in objective research before believing “facts” that align with your preconceived ideas.
- Loss aversion involves the human phenomenon of experiencing the pain of losses more strongly than the joy of comparative gains. It could see you hold onto poorly performing stock merely to postpone the sting of a loss. Avoiding emotional attachment is key here.
- Herd mentality, also known as “trend-chasing”, involves following the crowd because it’s assumed to be the right course for you, even though every individual has a risk strategy and set of circumstances all their own. Concentrate on your own goals, regardless of what others are doing.
Understanding and acknowledging these biases puts you in the best position to take an objective step back before making important investment decisions.
4. Consider the benefits of pound cost averaging
If you receive a work bonus or a sudden windfall, you might be tempted to invest the whole amount straight away. But first, consider the potential effect of pound cost averaging.
Splitting your bonus into smaller chunks and topping up your portfolio regularly throughout the investment cycle helps to smooth out the daily ups and downs of the market.
Setting up a regular investment also helps you to stay unemotional and avoid the temptation to try and time the markets.
5. Stay focused on your long-term goal
A brief look at the historic stock market performance shows that the general trend is upward.
This is why your investment is long-term and why it’s important to remain focused on your goals.
Over the last few years, markets have been hit by the coronavirus pandemic, the war in Ukraine, and now the Israel-Hamas war. Before that, it was the Gulf War, the bursting of the dot.com bubble and the 2008 global financial crisis.
Short-term dips are inevitable, but history suggests they are often followed by longer periods of growth.
Staying unemotional, avoiding knee-jerk reactions, and trusting your strategy is the best formula for investment success.
At Globe IFA, we regularly monitor your portfolio to ensure it always aligns with your risk profile and goals. If market movements or your changing priorities mean we need to amend your asset allocation or make other changes, we can.
You’re in control and we’re always on hand to provide reassurance when short-term dips occur.
Get in touch
If you need help becoming an investor pro, please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investments (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.
