Taking a long-term view
History suggests the stock market is the best way to grow wealth over the long term, easily outpacing interest rates on cash. However, significant market falls are also a part of investing and notoriously difficult to predict. It is worth remembering that the longer you invest for the greater your chances of a positive return, which is why most people suggest you should only invest in higher risk investments such as shares if you are committed to do so for a minimum of five years.
Many people assume that to become a wealthy investor you need a large pot of money to begin with. Yet almost anyone can build a sizeable sum over time by investing small amounts regularly. The important thing is getting started, and the earlier you do the more time your chosen investments have to grow.
Regular savings also tend to help counter the volatility of the stock market. By investing a given amount in a fund or share regularly you end up buying at different prices. Dips in the market, particularly in the early years, could even work to your advantage. Many investors use regular savings with the aim of building a pension pot, putting aside money for children or to pay off a mortgage, but whatever your goal the earlier you start the easier it should be to reach your objective. You can, for example, start a regular savings plan into a fund in an ISA, Junior ISA, SIPP or Investment Account from just £50 per month.
Ignoring the “noise”
For the average private investor trading in and out of the stock market over the short term can be unwise – even if political or economic reasons seem compelling. Not only are outcomes unpredictable, but so are their effects on financial markets. It’s usually more prudent to stay fully invested throughout market cycles as missing even a small number of the really good days can compromise long-term returns. As the old stock market adage goes: time in the market matters more than timing.
Diversifying (but not over diversifying)
Diversification is the cornerstone of sensible portfolio management. Having all your eggs in one basket might make you a fortune, but it might lose you one too. A related issue is unwittingly having too much of a portfolio facing in one direction. For instance, investing in mining funds and Chinese equities may offer little diversification. Many companies in the mining sector are reliant on Chinese growth, so it can sometimes mean the two areas rise and fall in tandem.
Similarly, watch out for funds that overlap in terms of style or holdings, or which have large stakes in shares you already hold. While diversifying is sensible there is no point having several funds in the same sector doing the largely same thing. Strike a balance between backing your best ideas and having a sensible spread.
Using tax shelters
It makes sense to take advantage of your annual tax wrappers such as ISAs. Even if this isn’t relevant to you in the shorter term your tax position may change in the future. Many investors have built ISA portfolios worth hundreds of thousands of pounds, a sizable nest egg sheltered from capital gains tax and income tax. The 2017/18 tax year ISA allowance is £20,000.
If you are investing for retirement then a pension could be an even more tax efficient route as it is possible to receive tax relief on contributions of up to 45 per cent. However, an ISA provides more flexibility to access money when needed. Tax treatment depends on your individual circumstances and may be subject to change in the future.
This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplemental Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.