Investing doesn’t need to be complicated or difficult, but there are a few golden rules which may help you stay on track so hopefully you can meet your financial objectives.
Bear in mind though, that however disciplined you are, and whichever rules you follow, investing involves risk, and you may still get back less than you put in.
Here’s our rundown of the 10 rules that every investor needs to know:
1. Set yourself goals
Knowing what your financial goals are and what sort of timeframe you are investing over may help you stick to your strategy. For example, if you have long-terms goals, perhaps saving for retirement which may be several decades away, you may be less tempted to dip into your investments before you stop work.
2. The bigger the potential returns, the higher the level of risk
The prospect of higher returns may be appealing, but there’s usually a greater risk of losing your money. Think carefully about your approach to risk. You may be more comfortable opting for less risky investments, even if returns are likely to be lower. Remember though, that no investment comes without risk, and there is always the chance you could get back less than you put in.
3. Don’t put all your eggs in one basket
We all know the saying ‘don’t put all your eggs in one basket’, but it’s particularly important to apply this rule when investing. Spreading your money across a range of different types of assets and geographical areas means you won’t be depending too heavily on one kind of investment or region. That means if one of them performs badly, hopefully some of your other investments might make up for these losses, although there are no guarantees.
4. Invest for the long-term
Investing should never be considered a ‘get rich quick’ scheme. You need to remain invested for at least five years, but preferably much longer to give your investments the best chance of providing the returns you’re hoping for. Even then you must be comfortable accepting the risk that you could get less than you put in. If your investment goals are short-term, for example, two or three years away, investing won’t be right for you, as you’ll need to keep your money readily accessible, usually in a savings account.
5. If it seems too good to be true, it usually will be
Beware highly speculative investments that seem too good to be true, and don’t follow the herd and invest just because other people are. For example, many investors piled into digital currency Bitcoin in the latter half of 2017 as its price surged, only to see its value halve in a month. In mid-December 2017, Bitcoin was trading at nearly $20,000, but it fell below $10,000 by mid-January 2018.
6. Never invest in anything you don’t understand
Before you put your money into any investment, take time to research it thoroughly, so you understand exactly what’s involved and what the risks are. Funds, for example, issue a Key Investor Information Document (KIID), or Key Information Document (KID), which explains the fund's key features and charges. You must read this before you invest. If you’re investing in individual businesses, make sure you know what the company does and how it plans to make money in future.
7. Factor in charges
Charges will have an impact on your overall returns, so it’s important to take these into consideration when choosing your investments. For example, if buying funds, the Ongoing Charges Figure (OCF) is set out on the KIID/KID and provides the clearest picture of your actual costs. This figure includes the fund’s Annual Management Charge, and also the other main ongoing costs that were deducted from the fund the previous year. When you place a purchase instruction we will also present to you other costs of the fund which the manager does not include in the OCF. You should consider these costs carefully - for example, if a fund returns 4% and the OCF and other charges have previously come to 2%, your profit would have reduced to 2%.
8. Reinvesting income can help boost overall returns
If you don’t need an income from your investments, you may want to consider reinvesting it to buy more of your investment which will potentially grow in value and boost your overall returns. In simple terms, your returns also earn returns, which is known as compounding. Bear in mind, however, that reinvesting income rather than taking it as cash means you could lose it or see its value fall. If any income you receive is reinvested automatically – for example, if you invest in shares directly and have signed up for automatic dividend reinvestment (ADR) - you also won’t be able to choose the price at which you’ll be buying any additional shares, so it could be low or high.
9. Don’t try to time the market
In an ideal world, you’d be able to buy investments just before they increase in value and sell before they fall. However, no-one knows which way stock markets will move next, so trying to predict market ups and downs could mean that you end up buying or selling at just the wrong time. Buying and holding investments can help you remain committed to your investments for the long term, avoiding panic decisions when markets are volatile.
10. Review your portfolio
Although too much tinkering with your investments isn’t usually a good idea, that doesn’t mean you should just forget about them. Your investments will change in value over time which may mean your asset allocation – how you choose to split your money between different assets, such as shares, bonds, cash and property – moves out of line with your investment objectives. That means you may need to rebalance your portfolio from time to time to make sure you’re still on track to meet your goals.