Practical principles for better investors

What you’ll learn:

• How to prepare to invest.
• Why you need to know what you want from your investments.
• How staying invested for the long term could increase your chances of success.

Before you start

Before you start investing, it is essential that you ensure your personal finances are in good shape. For example, there is little point in investing if you are being weighed down with any significant debts.

Ideally you should separate the money you intend to invest from your household budget. This means the cash you earmark for investments is money that you won’t need to call upon for any financial emergencies - it is highly recommended that you already have sufficient savings to cover such events. Bear in mind that investing comes with risk and you could lose money, although once you are prepared to stick with it for the long run, at the very least five years, you should hopefully come out on top.

But you must be confident that if you lost any of your investment money, it wouldn't cause real financial hardship. Part of being prepared also involves making sure you know what you are doing, and why you are doing it, with each and every investment opportunity. Some investors feel confident enough to make their own investment decisions, while others prefer to take professional advice.

Your first steps

You need to be certain of what you want from your investments. While the obvious answer is to make a profit, you also need to have a pretty solid idea of whether your individual needs for this profit should come in the form of capital appreciation or in the form of an income to cover expenses such as school fees, a buy-to-let mortgage, or to support you in retirement.

When you're certain about what you want from your investments, you need a fair degree of clarity over your investment horizons, and which investment types will best deliver your profit goals and targets. How long do you need to invest for - until mid-way through your adult life? Until your kids leave university? Until you retire? Your answers will shape how you'll be spreading your investment sum over asset classes such as shares, government bonds, corporate bonds and cash - and in what proportion.

It doesn't matter if these ambitions change over the years - it would be pretty unusual if they didn't - because you'll be carrying out regular reviews to assess the best times to rebalance your investment portfolio's asset allocation.

Reducing unnecessary risk

The level of risk you take will largely be dictated by not only how adventurous you are as a person but what your goals are and how long you intend to invest for. For someone years away from needing the money, investing in riskier assets such as shares is likely to be more appropriate than for an individual who has a strict time limit of say five years, who many be better off sticking to less volatile investments such as bonds.

Ultimately the basic rule of thumb to always remember is that the greater the potential returns, the larger the risk involved. Remember however that all investments come with risk and you could get back less than you invest.

If you are unsure of how much risk you should take on, it could be worth speaking to an independent financial adviser.

Staying invested

Dipping in and out of the market is a dangerous game. Nobody can accurately forecast the best time to either buy or sell an investment. If we could we'd be very rich. For those that have on occasion managed to successfully time their investments, it has probably been more down to luck than judgement. While past performance should not be taken as a guide to future returns, research has however repeatedly shown that those who have stayed invested throughout market cycles have typically done better in the past than those who tried to time their investment decisions. Successful investing is all about ‘time in the market, not timing the market’.

Find out more about the significance of spending time in the market