8 Investment Tips to Think About Before You Invest
By sticking to a few fundamentals and mastering some key behaviors, you'll give yourself the best shot at becoming a successful investor.
With the right approach anyone is capable of investing their spare cash to secure a brighter financial future. Read our eight-step guide to find out how you can become a successful investor.
Think about the long term
Any money you invest should be treated as untouchable for a minimum of five years, but ideally more. A longer time horizon will give your investments more time to compound and grow, as well as to recover from periods of short-term volatility.
Cashing in investments at the wrong time can spell bad news for your portfolio, so to avoid this risk make sure you have enough money in savings for any known expenses and between three and six months' salary for financial emergencies in an easy-access cash ISA.
Diversify your portfolio
Diversification — investing-speak for not putting all your eggs into one basket — is achieved by spreading your money across different types of assets, such as shares, bonds or commercial property, in addition to different industries and geographies.
Follow this fundamental rule and you could find that, when one investment struggles, another helps cushion the blow. Often the easiest, most cost-effective way to tick this box is to invest in funds.
» MORE: Investment funds explained
Pay attention to charges
Regardless of where or how you invest, there are going to be fees. It’s astonishing how much seemingly small charges can eat into your returns, which is why it's vital to keep them to a minimum without making too many compromises.
Consider the following: £30,000 invested over 20 years at an annual growth rate of 5% would be worth £75,893, if you paid a yearly fee of 0.25%. But if you paid a yearly fee of 0.75%, the same investment would be worth just £68,967.
If it seems too good to be true…
Everyone from the daily papers to your neighbour or colleague at work will at some point throw a get-rich-fast investment tip your way. Ignore them.
There’s no such thing as a freebie. Greater prospective returns come with higher risk, and the prices of popular investments often reflect ridiculously high expectations, meaning that even a minor setback can send them tumbling.
Understand what you’re invested in
Famed investor Warren Buffett once said, 'Never invest in a business you cannot understand.' When picking an investment, make sure you’re familiar with what the company does, the industry it operates in, how it generates money and how it plans to continue doing so.
Read the available literature, including prospectuses, annual reports, financial statements and, for funds, the Key Information Document (KID), to establish what you’re getting into – and don’t just fixate on the headline figures the marketing teams want you to see. If there’s something you don’t understand, look it up. And be wary of too much complexity and jargon, as it could be a red flag.
Good things come to those who wait
Spend time doing research before you buy, and then be patient, stick to your plan and don't panic. Yes, occasionally review your portfolio to ensure it still meets your long-term needs. Just be rational — remember why you made the investment in the first place, and don’t freak out at the first sign of trouble. Most investors suffer losses because they sell at the wrong time.
Often, the best approach can be to buy and hold. The longer you wait, the more time there is to ride out any bumps and benefit from the snowball effect of compounding: earning gains on gains.
If you are given the option to reinvest income generated from your investments, say yes. Automatically buying more holdings with the payments you receive will increase the amount of dividends you get next time, and so forth.
Use your annual ISA allowance
When you make money, the government usually wants a cut. Fortunately, when it comes to saving and investing, there’s some protection.
Everybody in the UK over 18 can deposit up to £20,000 a year into a tax-free individual savings account (ISA). Invest your full allowance each year in a Stocks and Shares ISA and you’ll be shielded from paying tax on dividend payments and any profits made from selling investments.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you
Daniel is a freelance finance journalist. He has written and edited news, deeper analysis features, and opinion pieces for the Financial Times, Investopedia and the Investors Chronicle. Read more