If you are new to investing then here are some guiding principles to help you make sound investing decisions. First though, some food for thought. If you set aside just £2,000 of your savings for investing on the stock market and achieved the historical average stock market return of 10% each year then in 30 years’ time you would realise £34,898.80. Want to find out how? Here are the secrets of sound investing.
Secret 1: Research
Secret 2: Debt
Use your money to pay that credit card debt off first. With at least 15% annual interest rates on most credit card debts you will need to at least match this return with your investment to break even. Clear that debt before you start investing.
Secret 3: Risk
Investment experts like APT tell us that even the largest financial institutions no longer ask how much money they can make but how much they can afford to risk. This is secret number 3: only ever invest what you could realistically afford to lose.
Secret 4: Patience
Investing in the stock market is a long-term investment. You should only allocate funds that you won’t need for at least three years, and preferably five years or longer. If you are going to need that cash next year consider a shorter-term haven for it such as a money market fund or CD.
Similarly although it is advisable to play an active role in managing your investments you should avoid constantly trading in and out of the market. A well-chosen investment over a long term is the most prudent option. Weather those storms and you can avoid those fees that chip away at your returns and still come out smiling.
Secret 5: Stocks or bonds
It is true that one way to manage the risk metrics of your investments is to diversify. Never place all your nest eggs in one basket. A mix of investments from different sectors, markets and asset classes will help smooth the ups and downs. Having said this, when it comes to bonds and stocks you should alter the share of your investing capital according to your time of life. When you are young place most of your money in the stock market. You will have plenty of time to ride over any dips in the market. Switching to bonds later in life makes sense as you will increasingly depend on your investments for income.
Secret 6: Start small and safe
A sensible option for starting investing is a diversified mutual fund. There are many high quality, no-load funds that invest in larger company stocks and do not require a massive injection of cash up front. They have the benefit of spreading your risk across a number of companies so that you are not left dependant on the fortunes of individual stocks which could increase your potential rewards but only at the cost of much higher risk.
Secret 7: Be active (but it is alright to be passive)
You should always manage your investments actively and track their performance. However, there are two ways to actually invest. Active investment tries to beat the market by choosing individual investments it believes will outperform it and bring higher returns. A safer approach is to invest in holdings that simply follow an index created by a third party: this is known as passive investment. The final secret is that over the long haul, most actively managed stock mutual funds have underperformed the S&P 500 Index, the most popular and prominent benchmark for index funds.